Severance Pay Arrangements May Be Affected by New Deferred Compensation Rules

Originally published December 2005

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. This legislation added Section 409A to the Internal Revenue Code, fundamentally changing the tax treatment of deferred compensation plans, including certain severance pay plans and agreements. The new rules, which are generally effective for severance payments made on or after January 1, 2005, are complicated and confusing. The Internal Revenue Service and Treasury Department have provided some guidance as to the interpretation and application of the new rules, and proposed regulations were recently issued. However, many unanswered questions still remain, and the proposed regulations may differ from the final regulations that are ultimately issued.