The last day of 2012 ends the two-year transition period for employers to revise employment agreements that require executives separated from service to sign a release of claims document before receiving post-termination pay and avoid further compliance problems under §409A. IRS Notices 2010-6 and 2010-80 contain guidance on how employers can repair questionable agreements to conform with §409A requirements, and Notice 2010-80 provided additional transition relief through December 31, 2012, for plans that contain certain failures involving payments dependent upon the service provider completing certain employment-related actions (such as the execution and submission of a noncompetition agreement, a nonsolicitation agreement, or a release of claims) as of December 31, 2010.

Practitioners have noted that the compensation agreements most likely to be affected include severance plans, change-in-control and employment arrangements, and certain restricted stock unit and other cash-settled equity compensation awards that contain a severance feature. Agreements not self-corrected by year-end face potential penalties and will have to apply under the IRS’s §409A document corrections program.

Firms also must notify the IRS about the changes made to these agreements in an attachment to the company's federal tax return for the affected tax year for which the corrections are made, along with the name and taxpayer identification number for each related employee or service provider, identification of the plan or arrangement that was changed, statement identifying the IRS notice and section that was used as the basis for the correction, the date the correction was made, and the amount of compensation involved in each correction.

--Mark Wolf

Compensation Planning Group