Section 409A is a recent addition to the Internal Revenue Code. It applies to compensation that an employee earns in one year but that is not paid until a future year. Unless this deferred compensation meets certain requirements, the income is subject to additional taxes, including a twenty percent additional income tax.
Various exceptions exclude certain compensation that would otherwise be subject to 409A. For example, funds received through short-term deferrals and funds paid upon an employee’s involuntary termination from work may be excluded if certain conditions are met.
An executive who is asked to enter into an employment agreement or a separation agreement must ensure that the agreement complies with 409A or must be willing to pay the additional taxes. Because these agreements are typically drafted by the employer’s attorney, an executive should consult with employment counsel or tax counsel regarding the implications of any compensation scheme before signing an agreement.
To speak to an attorney regarding employment contracts or separation agreements or to ask an employment law attorney to review a proposed employment agreement or separation agreement, contact the employment lawyers at Clouse Dunn Khoshbin LLP at [email protected].
