Below we discuss some of the most common issues regarding compliance with the provisions of Section 409A, as they relate to employment contracts. Often, a client will ask whether it is better to arrange deferred compensation to fit into a 409A exception, or simply design the language so that the agreement corresponds to 409A. The answer will depend to a large extent on the expected benefits. Some forms of benefits are adapted to exceptions 409A, others are almost impossible to exempt. As a general rule, it is not difficult to design a deferred compensation plan so that it initially corresponds to 409A. The biggest problem with a 409A plan is the long-term application of the plan. People like to change their minds when it comes to money, and 409A opposes change! Deferred compensation can exist in many forms, and the rules and exceptions for deferred compensation are far too numerous and complex to be fully described here. But what we can do is when an executive is fired, an employer may try to negotiate severance pay that is significantly different from the severance pay of the executive`s employment contract. If severance pay is governed by Section 409A, the time and form of the payment cannot be changed solely by desolate or forgoing the rights of an old contract for payments made under a new contract.
This is considered a replacement payment under Section 409A and a replacement payment must keep the same time and form of payment as the original agreement. Another exception of 409A, which applies to severance pay, is the separation salary of a safe port. Under this exemption, a provision providing for a “separation salary” only in the event of involuntary separation does not meet the deferral of the allowance, to the extent that the separation allowance or part of the separation salary meets the following conditions: some practitioners deal with 409A issues and definitions throughout the employment contract by referring to the current regulations of the Ministry of Finance. For example, a contract or agreement may provide for deferred compensation in the event of a “change of control” within the meaning of Treas. Reg. Section 1.409A-3 (i) (5) (v) must be paid. Another approach is to include a 409A savings clause that requires the terms of the employment contract to be interpreted in a manner consistent with 409A.