Guide Details 409A Exemptions for Employer Severance Arrangements
In-house counsel and HR leads for companies offering severance packages must review 409A exemption eligibility, as non-compliant arrangements trigger 20% excise taxes and adverse tax consequences for both employers and departing employees.
A recent guide clarifies that severance may qualify as deferred compensation subject to Section 409A’s strict timing rules, but multiple exemptions apply to common severance structures. Key exemptions include the short-term deferral rule for payments made within 2.5 months of the year the right is no longer subject to forfeiture, the involuntary separation pay plan exemption for payments up to $720,000 (2026 limit) paid within two years of separation, and exemptions for COBRA premium reimbursements, outplacement costs, and limited separation pay under $24,500 (2026). Arrangements can also stack multiple exemptions for different payment components, and non-exempt severance can be structured to comply with 409A’s fixed payment date and permissible event requirements, including a mandatory six-month delay for specified employees of public companies.