409A Risks With Relocation Reimbursements

As employers increasingly focus on in-person office mandates, reimbursements for relocation expenses have once again become a key component of attracting top talent. If not carefully structured, however, such expense reimbursements may inadvertently trigger significant adverse tax consequences under Section 409A of the Internal Revenue Code. This post discusses some of the requirements under Section 409A and offers tips for avoiding some of the common pitfalls in drafting relocation benefits.

Section 409A

Section 409A applies to compensation which is promised in one taxable year, but which is or may be payable in a following one. A failure to comply with Section 409A's rules regarding timing and structure can result in an additional 20% excise tax on the employee, immediate income inclusion, and potential penalties for both the employee and employer.