Section 409A and Releases of Claims

Abstract

It has long been a common practice to require exiting employees to execute a release of claims as consideration for the receipt of severance and other separation payments. While historically this practice may have had little to do with deferred compensation, a surprising degree of complexity and confusion has arisen concerning the intersection of releases and Section 409A of the Internal Revenue Code. This complexity and confusion has led to not one but two notices being issued by the Treasury Department and Internal Revenue Service addressing the correction of documentary violations caused by release provisions. This article discusses in detail various issues arising from the use of a release in a separation arrangement, the proper way to draft release provisions (both where the separation pay constitutes deferred compensation under Section 409A and where it does not) and methods for correcting release provisions that potentially violate Section 409A, including an analysis of the effects of guidance on correcting release provisions embodied in IRS Notice 2010-80.