The term, Significant Expiration Risk (SRF), is considered in bulk as a vesting condition and is one of the most important concepts of Section 409A. The above negative tax consequences do not apply as long as an amount is subject to an SRF and there are opportunities to correct offences under Section 409A that are only available as long as an amount is subject to an FRS. However, an exception to Section 409A, known as the Short-Term Deferral Exemption, which activates the definition of the SRF, is even more powerful. Short-term deferrals are best considered as a payment agreement. As long as a payment is made once (or shortly after), the agreement is generally exempt from the incriminating rules of Section 409A. A traditional retention bonus is the most linear example of short-term deferral. The plan in question provided for a deduction bonus granted after three years of employment and then paid in the two years following the lease. However, under the terms of the agreement, the employer had the power to expedite payments and pay them lump sum on the first anniversary of the delay date. The employer acknowledged that the agreement had violated section 409A`s anti-acceleration rule and attempted to correct the agreement by changing it to deprive the employer of the opportunity to expedite payments. The change took place in the same taxable year in which the withholding bonus had elapsed, but before the effective transfer date. The termination of the employment relationship is carried out in accordance with Section 409A if the employer and management reasonably believe that no other service will be provided to the employer (or its parent or subsidiary companies) after a certain date, or that the level of services to be provided after that date (either as an employee or as an independent contractor) will be reduced to 20% or less of the services provided by the worker during the period of 36 months ago. When an officer retires, the employer may retain management to provide consulting services as an independent contractor. However, under Section 409A, consultant services are considered consultants to determine the existence of a termination of employment.
If the company maintains management to provide 50% or more of the consulting services it provides as a worker, it has not separated from the benefit with the employer for section 409A purposes. This means that payments made under an unqualified employment contract or deferred compensation plan, which should begin with the termination of the employment relationship, can only begin when the executive has a genuine separation of services within the meaning of Section 409A.