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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
agreement under which the employee provides services.
3 Separation from employment.
Except as otherwise provided in this paragraph, separation from employment has the same meaning as separation from service as defined in 1.409A
1h. Pursuant to 1.409A1h, an employee generally separates from employment with the employer if the employee dies, retires, or otherwise has a termination of employment with the employer or experiences a sufficient reduction in the level of services provided to the employer. For purposes of applying the rules regarding reductions in the level of services set forth in the definition of termination of employment in 1.409A1h1ii, the rules are modified for purposes of this paragraph such that an employer may not set the level of the anticipated reduction in future services that will give rise to a separation from employment, meaning that the default percentages set forth in 1.409A
1h1ii apply in all circumstances.
Thus, an anticipated reduction of the level of service of less than 50 percent is not treated as a separation from employment, an anticipated reduction of more than 80 percent is treated as a separation from employment, and the treatment of an anticipated reduction between those two levels is determined based on the facts and circumstances.
The measurement of the anticipated reduction of the level of service is based on the average level of service for the prior 36 months or shorter period for an employee employed for less than 36
months. In addition, an employees separation from employment is determined without regard to 1.409A
1h2 and 5 application to independent contractors, since, for purposes of this section, only an employee may have a separation from employment, and a change from bona fide employee status to bona fide independent contractor status is also a separation from employment. See 53.49602a1 regarding the treatment of an employee who also serves as a director of a corporation or in a substantially similar position. The definition of separation from employment also incorporates the rules under 1.409A1h1i addressing leaves of absence, including military leaves of absence, 1.409A1h4
addressing asset purchase transactions, and 1.409A1h6 addressing employees participating in collectively bargained plans covering multiple employers. The definition further incorporates the rules of 1.409A
1h3, under which an employee
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separates from employment only if the employee has a separation from employment with the employer and all employers that would be considered a single employer under section 414b and c, except that the at least 80
percent rule under section 414b and c is used, rather than replacing it with at least 50 percent. However, for purposes of determining whether there has been a separation from employment, a purported ongoing employment relationship between a covered employee and an ATEO or a related organization is disregarded if the facts and circumstances demonstrate that the purported employment relationship is not bona fide, or the primary purpose of the establishment or continuation of the relationship is avoidance of the application of section 4960.
f Accelerated payment or accelerated vesting resulting from an involuntary separation from employment1 In general. If a payment or the lapse of a substantial risk of forfeiture is accelerated as a result of an involuntary separation from employment, generally only the value due to the acceleration of payment or vesting is treated as contingent on a separation from employment, as described in paragraphs f3 and 4 of this section, except as otherwise provided in this paragraph f. For purposes of this paragraph f, the terms vested and substantial risk of forfeiture have the same meaning as provided in 53.49602c2.
2 Nonvested payments subject to a non-service vesting condition. If without regard to a separation from employment vesting of a payment would depend on an event other than the performance of services, such as the attainment of a performance goal, and that vesting event does not occur prior to the employees separation from employment and the payment vests due to the employees involuntary separation from employment, the full amount of the payment is treated as contingent on the separation from employment.
3 Vested payments. If an involuntary separation from employment accelerates actual or constructive payment of an amount that previously vested without regard to the separation, the portion of the payment, if any, that is contingent on the separation from employment is the amount by which the present value of the accelerated payment exceeds the present value of the payment absent the acceleration. The payment of an amount otherwise due upon a separation from employment whether voluntary or involuntary is not treated as an acceleration of the payment unless the
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payment timing was accelerated due to the involuntary nature of the separation from employment. If the value of the payment absent the acceleration is not reasonably ascertainable, and the acceleration of the payment does not significantly increase the present value of the payment absent the acceleration, the present value of the payment absent the acceleration is the amount of the accelerated payment so the amount contingent on the separation from employment is zero. If the present value of the payment absent the acceleration is not reasonably ascertainable but the acceleration significantly increases the present value of the payment, the future value of the payment contingent on the separation from employment is treated as equal to the amount of the accelerated payment.
For purposes of this paragraph f3, the acceleration of a payment by 90 days or less is not treated as significantly increasing the present value of the payment. For rules on determining present value, see paragraph f6 and paragraphs h, i and j of this section.
4 Nonvested payments subject to a service vesting conditioni In general.
If an involuntary separation from employment accelerates vesting of a payment, the portion of the payment that is contingent on separation from employment is the amount described in paragraph f3 of this section if any plus the value of the lapse of the obligation to continue to perform services described in paragraph f4ii of this section but the amount cannot exceed the amount of the accelerated payment, or, if the payment is not accelerated, the present value of the payment, to the extent that all of the following conditions are satisfied with respect to the payment:
A Vesting trigger. The payment vests as a result of an involuntary separation from employment;
B Vesting condition. Disregarding the involuntary separation from employment, the vesting of the payment was contingent only on the continued performance of services for the employer for a specified period of time;
and C Services condition. The payment is attributable, at least in part, to the performance of services before the date the payment is made or becomes certain to be made.
ii Value of the lapse of the obligation to continue to perform services. The value of the lapse of the obligation to continue to perform services is one percent of the amount of the accelerated payment multiplied by the number of full months between the date that the employees right to receive the payment
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