An article by Morgan Lewis & Bockius LLP explains that the Internal Revenue Service (IRS) takes the position that an arrangement providing for payments of Section 409A deferred compensation to be made subject to execution of a release may allow for the possibility that an employee could manipulate the year in which payment is made by accelerating or delaying the execution and delivery of the release. Where the employee can thereby exercise control over the year of payment, the IRS has indicated that such a provision would violate the prohibition on an employee directly or indirectly designating the calendar year of payment for a payment of deferred compensation subject to Section 409A, thus triggering an automatic Section 409A violation.  

The law firm notes that IRS Notices 2010-6 and 2010-80 offer corrective relief by providing that such documentary failures can be corrected by either of the following methods: 

• Providing for payment on a fixed date (such as on the 60th day following separation) so that delivery of the release does not affect payment timing; or 
• Providing that any payment that could be paid over a release consideration and revocation period beginning in one taxable year and ending in the subsequent taxable year will be paid in the subsequent taxable year (again, so that release delivery does not affect payment timing).   

Any deferred compensation arrangement under which payments of deferred compensation subject to Section 409A are contingent on a release must be amended by December 31 to comply with the requirements of Section 409A, generally using one of the two methods described above.