What Is the 409A Severance Pay Exception? Definition and Examples

Section 409A governs deferred compensation: pay you have a right to in one year that is paid in a later one. Severance promised today and paid after you leave fits that description. The regulation says so directly: tying a payment to leaving does not stop it from being deferred pay. Then it lists the exceptions.

The main one is in Treas. Reg. §1.409A-1(b)(9)(iii). It covers severance paid only on an involuntary separation, or under a window program open for no more than 12 months. Two limits apply. The total can be no more than twice the lesser of two amounts: your yearly pay rate in the year before you leave, or the §401(a)(17) limit for the year you leave. And it must be paid by the end of the second tax year after the year you leave.

The cap is a ceiling on what the exception covers. Severance above it is not void. The part above the cap is deferred pay and must meet every 409A rule. The same is true of any severance paid after the deadline.

What Counts as Being Let Go

A separation is involuntary when the employer decides to end the job and you were willing and able to stay. A contract the employer does not renew can count, if you would have signed a similar one. The label in your paperwork is presumed right, but the facts can override it. If you “resign” knowing you would otherwise be fired, the separation is involuntary.

Quitting for good reason can also count. The regulation gives a safe harbor. Something must change for the worse without your consent: a material cut in base pay, authority, duties or budget, a material move of your workplace, or a material breach of your agreement. You must give notice within 90 days of the change. The employer must then get at least 30 days to fix it. You must leave within a set period of no more than two years. And the severance must match what you would get if you were let go.

Severance can sit outside 409A in three main ways. Each is checked on its own terms.

1. 1.0
   Short-term deferralSeverance that depends on being let go without cause is at risk until you leave. If it is paid by the 15th day of the third month after the year you leave, it is a short-term deferral. There is no cap. For a 2026 departure, the date is March 15, 2027.
2. 2.0
   The separation pay exceptionSeverance paid only on an involuntary separation, up to twice the lesser of your pay or $360,000 for 2026, and paid by the end of the second year after you leave.
3. 3.0
   Small paymentsSeverance totaling no more than $24,500 for a 2026 departure is outside 409A, even when you resign.

Some extras sit outside 409A too. Outplacement, reasonable moving costs and business expenses reimbursed for a limited period are exempt. That period runs to the end of the second year after you leave, with payment by the end of the third. Reimbursed medical costs are exempt for as long as you could have kept your health coverage under COBRA. Severance required by foreign law and settlements of genuine legal claims are also outside 409A.

One trap applies when you resign. If you give up unvested deferred pay and get a payment on the way out, the regulation presumes the payment replaces what you forfeited. That payment is then deferred pay subject to 409A. If the severance is deferred pay and your employer is public, a specified employee must also wait six months after leaving for it.

Five people leave the same private company in 2026. Each has a calendar tax year. The table checks their severance against the exceptions.

The second row shows how the cap works. The executive’s pay is above $360,000, so the federal limit sets the cap at $720,000. The first $720,000 can use the exception. The remaining $280,000 is deferred pay. It must be paid on a schedule fixed in advance, and that schedule cannot be sped up or changed freely. If the agreement instead paid the full $1,000,000 by March 15, 2027, all of it could qualify as a short-term deferral.

• Using this year’s pay for the capThe cap uses your pay rate for the year before you leave, with any raise expected to last.
• Calling a resignation involuntaryThe paperwork label is presumed right, but the facts can override it in either direction.
• A loose “good reason” clauseOutside the safe harbor, a quit for good reason may not count as being let go.
• Paying past the deadlineSeverance paid after the second year following your exit loses the exception.
• Replacing forfeited deferred payOn a resignation, a payment is presumed to stand in for what you gave up. It is then subject to 409A.

Severance meets several other 409A rules. See Section 409A for the whole set, 409A payment events for when deferred pay may be paid, and the anti-toggle rule for why one exit cannot pay two ways. For what a failure costs, see 409A penalties. For equity that often comes up at the same exit, see vested vs unvested.

Separation pay exception

The rule that severance paid only on an involuntary separation, within the cap and the deadline, is not deferred pay.

Deferred compensation

Pay you have a right to in one year that is paid in a later year.

Involuntary separation

The employer ends the job while you were willing and able to stay. A safe-harbor good-reason exit counts too.

Good reason

A material change for the worse, made without your consent, that lets you quit and be treated as let go.

Window program

A severance offer open for no more than 12 months to people who leave in that period.

§401(a)(17) limit

The yearly pay limit for retirement plans, $360,000 for 2026. The severance cap is twice it at most.

Short-term deferral

Pay received by the 15th day of the third month after the year it vests. Outside 409A.

Separation from service

Leaving the employer in the sense 409A uses.

Every rule and figure was checked against the Treasury regulations, the tax code and the IRS on November 9, 2026. The exceptions are in Treas. Reg. §1.409A-1(b)(9). The people, amounts and dates in the example are illustrative and use no market data. State law is not covered.