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Part 26 · Chapter 3

Severance under §409A and §457, and Severance Taxation

Law stated as of October 3, 2026 · Severance, WARN, and Workforce Restructuring

Scope and status

This chapter covers, in depth, the §409A exemptions that severance arrangements actually run on — the short-term deferral rule and the five separation-pay exemptions of Treas. Reg. §1.409A-1(b)(9), including the two-times/two-year involuntary separation exception with its current-year dollar figures, the collectively bargained and foreign-law exemptions, and the reimbursement and limited-payment exemptions — together with what counts as an involuntary separation, the good reason safe harbor, window programs, the six-month delay for specified employees, the release-timing trap, the §457(e)(11) bona fide severance pay plan exclusion for governmental and tax-exempt employers, and the employment taxation of severance and SUB pay. Related questions are treated elsewhere: ERISA plan status, the §2510.3-2(b) pension-plan trap, and release/OWBPA mechanics in Severance Plan Status, Window Programs, and Design; WARN in The WARN Act and State Mini-WARN Laws; and the general §409A machinery (plan aggregation, the six permissible payment events, deferral elections, the §409A penalty, and correction under Notices 2008-113 / 2010-6 / 2010-80) and §457(b)/(f) generally in Part 18 (Nonqualified Deferred Compensation, 409A, 457, and Executive Compensation) — this chapter covers only the severance-facing slice.

Sections

Part A is shown in full. The other sections are listed by title; their text is available to subscribers.

Part A — Work the Exemptions in Order

A1.The sequence

Part 26, ch. 3, § A1

For any severance arrangement, test the exemptions in this order before concluding that §409A applies: (1) is there a legally binding right to compensation at all; (2) does the short-term deferral rule cover it; (3) does a separation pay exemption under §1.409A-1(b)(9) cover it — and note that the separation-pay exemptions can be stacked, so a single arrangement may be partly exempt under (b)(9)(iii) and partly under (b)(9)(v); (4) only what remains is deferred compensation subject to §409A's timing rules. Final reg: Treas. Reg. §1.409A-1(b).

A2.The short-term deferral rule

Part 26, ch. 3, § A2

Compensation that the arrangement does not provide to be paid after the deadline below (that is, not a deferred payment) is not deferred compensation if it is actually or constructively received by the later of the 15th day of the third month after the end of the service provider's first taxable year in which the right is no longer subject to a substantial risk of forfeiture, or the 15th day of the third month after the end of the service recipient's first taxable year in which the right vests. Final reg: Treas. Reg. §1.409A-1(b)(4).

Part B — The Separation Pay Exemptions

  1. B1The general rule and the substitution warningSubscribers
  2. B2Collectively bargained separation paySubscribers
  3. B3The two-times / two-year involuntary separation exceptionSubscribers
  4. B4Foreign separation paySubscribers
  5. B5Reimbursements and limited payments — the exemptions that finish the jobSubscribers

Part C — Involuntary Separation, Good Reason, and Windows

  1. C1What "involuntary" meansSubscribers
  2. C2Good reasonSubscribers
  3. C3Window programsSubscribers

Part D — When §409A Does Apply

  1. D1The specified employee six-month delaySubscribers
  2. D2The release-timing trapSubscribers
  3. D3The consequence of failingSubscribers

Part E — Governmental and Tax-Exempt Employers: §457

  1. E1The bona fide severance pay plan exclusionSubscribers
  2. E2Dual compliance is requiredSubscribers
  3. E3If it is not a bona fide severance pay planSubscribers

Part F — Employment Taxation of Severance

  1. F1Severance is FICA and FUTA wagesSubscribers
  2. F2The surviving SUB-pay exception is narrowSubscribers
  3. F3Income tax withholding and reportingSubscribers
  4. F4Deferred-compensation severance and the special FICA timing ruleSubscribers
  5. F5Employer deduction timingSubscribers
  6. F6Severance and state unemployment benefitsSubscribers

The first Part of each chapter is open to everyone. The remaining sections, with their authority and practice points, are available to subscribers and to clients of ERISA Benefits Law Group, PLLC whose engagement includes access.

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