Representing Employees In The Brave New World Of 409A: New Rules On Deferred Compensation And Severence

Wendi S. Lazar, 2005. After the release of the Senate Finance Committee’s Enron Report, which detailed the ability of executives to cash out deferred benefits even while their company was sinking, President Bush signed into law Section 409A of the IRS Code as part of the American Jobs Creation Act of 2004. While recent IRS guidance and proposed regulation are not yet final, it is clear that traditional deferred compensation arrangements are no longer suitable for rewarding executives and other employees. Moreover, while employers (and other plan providers) have an obligation to comply, the law’s onerous tax penalties fall upon employees, if their employers’ plans and agreements do not comply.

As a result, attorneys who represent employees in negotiating employment and severance agreements must be familiar with 409A and understood how it affects cash and equity compensation arrangements and severance pay. Attorneys may also want to review their clients’ existing plans and agreements and to discuss alternative arrangements, if the pre-409A arrangements are no longer appropriate under the new rules.

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