What is a 409A separation from service? Definition, how it works and examples
When leaving a job counts as leaving under 409A — the reduced-services test, leaves of absence, consultants, and the six-month delay at a public company.
The short answer
A 409A separation from service is the moment leaving an employer counts as leaving under Section 409A: death, retirement or a termination of employment — including a permanent drop in work to 20% or less of your average over the previous 36 months. Only then can deferred pay that is tied to leaving be paid. It matters because the date in the HR system and the 409A date can differ.
How does 409A separation from service work?
Separation from service is the first of the six events on which Section 409A allows deferred pay to be paid, and the statute leaves its meaning to the Treasury. The regulation’s test is about expectation, not paperwork: did you and the employer reasonably anticipate that you would perform no further services after a certain date, or that your bona fide services would permanently fall to no more than 20% of their average over the immediately preceding 36 months? The 20% and 50% presumptions Two presumptions make the test workable.
Leaves of absence, consultants and directors
Leave of absence Military, sick or other bona fide leave does not end employment for up to six months, or longer while you keep a right to return under a statute or a contract. Without that right, employment is deemed to end on the first day after the six months. The leave is bona fide only if a return is reasonably expected. Medical leave If the leave is due to an impairment expected to last at least six months, or to end in death, and it stops you doing your job or a similar one, the six months become 29 months.
Example of 409A separation from service: four ways to step back
A head of product at a private company averaged 40 hours a week over the past 36 months. She has $200,000 of deferred bonus payable in a lump sum on separation from service. Four versions of her next step give four answers. In the second case, the company has to look at how she is treated: if she keeps her title, salary band and benefits, a separation is hard to argue. Paying the $200,000 anyway would be an early payment — a failure whose cost falls on her, worked through on 409A penalties.
The 409A separation from service definition, as of October 2026
General information, not tax advice Whether you have separated from service depends on the facts and on your plan’s written definition. If you are moving to part-time work, a consulting role or a long leave and have deferred pay or severance due on leaving, have the plan reviewed by a qualified tax adviser before the change.
Key risks and common mistakes
Paying on the HR date A last day in the payroll system is not proof of separation if a consulting arrangement at a high level follows. The quiet consulting agreement Becoming a contractor at 30–40% of former hours lands in the zone with no presumption. Write the expected level down. Long leave with no plan Without a right to return, employment ends after six months whether anyone notices or not — and payments due on separation become due. Contracts that roll over A contractor whose engagement the company expects to renew has not separated when one contract ends.
The terms this page uses
Separation from service Death, retirement or termination of employment as Treas. Reg. §1.409A-1(h) defines it, including a permanent drop to 20% or less of former services. Bona fide services Real work for the employer, as an employee or a contractor — the quantity the 20% and 50% tests measure. Look-back period The 36 months immediately before the change, or the whole period of service if shorter, over which the average is taken. Bona fide leave of absence Leave from which a return is reasonably expected. Up to six months — or longer with a right to return — it does not end employment.
What people ask about 409A separation from service
Is a move to part-time a separation from service? Only if your services are expected to fall permanently to 20% or less of your 36-month average, or to a lower line your plan sets in writing between 20% and 50%. At 50% or more you are presumed still in service. Does becoming a consultant to my old company count as leaving? Not automatically. Services as a contractor count toward the same test, so the question is the expected level of work, not the type of contract. What happens to deferred pay during a long leave? For up to six months nothing changes.
Is a move to part-time a separation from service?
Only if your services are expected to fall permanently to 20% or less of your 36-month average, or to a lower line your plan sets in writing between 20% and 50%. At 50% or more you are presumed still in service.
Does becoming a consultant to my old company count as leaving?
Not automatically. Services as a contractor count toward the same test, so the question is the expected level of work, not the type of contract.
What happens to deferred pay during a long leave?
For up to six months nothing changes. After that, unless you keep a right to return under a statute or a contract, you are treated as separated on the first day after the six months — or after 29 months if the leave is for a qualifying impairment.
Is separation from service the same as termination of employment?
Close, but not the same. A termination followed by substantial consulting work may not be a separation, and a sharp, permanent cut in hours can be one without any termination.
Does the six-month delay apply at a private company?
No. It applies only to specified employees of a company with publicly traded stock. At a private company, payment can follow separation on the plan’s normal schedule.
Where every rule on this page comes from
Every rule was checked against the statute and the Treasury regulations on 2 October 2026; the full definition is in Treas. Reg. §1.409A-1(h). The §401(a)(17) limit in the severance row is indexed every year. The example is illustrative, not market data.