4119 / What requirements apply to a 501(c)(9) trust (“VEBA”) that provides severance pay arrangements?
IRC Section 409A creates requirements governing whether and when employees are to be taxed on deferred compensation. Under the general rule, if a nonqualified deferred compensation plan fails to meet certain requirements regarding distributions, acceleration of benefits, and interest on tax liability payments ( Q 3541) or is not operated in accordance with such requirements, all compensation deferred under the plan for the taxable year and all preceding taxable years is includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.1
Plans providing for severance pay, or for separation pay, as it officially is labeled by the IRS, are not excluded from the definition of nonqualified deferred compensation plan (unlike bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefits).2 Final 409A regulations state that a separation pay plan does not provide for a deferral of compensation to the extent the plan is:
(1) a collectively bargained separation pay plan;
(2) separation pay due to an involuntary separation from service or participation in a window program;