Specified employee

From Benefits Collective
Jump to: navigation, search

Under Code Section 409A, "specified employees" must wait an additional six months after separation from service before receiving a distribution. "Specified employee" means a service provider who is a key employee of a service recipient any stock of which is publicly traded.


Key Employee

An employee is a key employee if he or she is either: (1) a five-percent owner of a publicly traded company, (2) a one-percent owner of a publicly traded company with compensation of more than $150,000; or (3) an officer of a publicly traded Company with annual compensation of more than $150,000 (adjusted annually in accordance with Code Section 416(i)(1)(A)(i))at any time during the 12-month period ending on a Specified Employee Identification Date.

If an employee is a key employee as of a Specified Employee Identification Date, the employee is treated as a key employee for purposes of 409A for the entire 12-month period beginning on the Specified Employee Effective Date.

Meaning of Officer

An officer for 409A purposes is defined much more broadly than an officer for SEC purposes. The Code Section 416 regulations define an officer as an administrative executive.

An employer with 500 or more employees can have no more than 50 officers who are specified employees. If there are more than 50, the 50 with the greatest compensation are specified employees.


Compensation for specified employee purposes means the definition of compensation under Treas. Reg. §1.415(c)-2(a), applied as if the employer were not using any safe harbor provided in §1.415(c)-2(d), were not using any of the special timing rules provided in §1.415(c)-2(e), and were not using any of the special rules provided in §1.415(c)-2(g).

An employer may elect to use any available definition of compensation under Code section 415 and the regulations thereunder in accordance with the election requirements set forth in Treas. Reg. § 1.409A-1(i)(8), including any available safe harbor and any available election under the timing rules or special rules, provided that the definition is applied consistently to all employees for purposes of identifying Specified Employees.

Specified Employee Identification Date

Specified employees are identified as of a "specified employee identification date." This date is December 31 (unless a different date is specified by the plan). If an employee is a key employee as of a specified employee identification date, the employee is treated as a key employee for the entire 12-month period beginning on the "specified employee effective date".

Specified Employee Effective Date

The "specified employee effective date" is the first day of the fourth month following the specified employee identification date (unless a different date is specified by the plan).

Techniques to Avoid Delay

Generally, the best way to avoid the six-month distribution delay is to find an exception to 409A for some or all of the payments. Distributions within the short-term deferral exception or severance payment exception, for example, are not subject to 409A and thus need not be delayed. It is sometimes possible to bifurcate a deferred compensation agreement into portions subject and not subject to 409A. For example, a plan document could designate each of a series of installment payment as a separate payment for the purpose of fitting some of the payments into the short-term deferral exception. If the other payments would occur more than six months after separation anyway, this technique allows one to effectively circumvent the six-month delay. (Note: This technique does not work if the benefit was vested in a year prior to separation -- the short-term deferral exception does not apply to previously vested benefits.)

Personal tools