"Good Reason" (For Severance)

General Usage

When an employment or severance-related agreement includes a "good reason" provision, an executive usually has the right to resign - under specified circumstances - and to receive the same severance that would be payable upon a termination without cause.  


The terms and conditions for a "good reason resignation" are normally spelled out in an employment agreement or a severance agreement.   A "constructive termination"  is somewhat different because that type of claim does not rely on a contractual mechanism for resignation, but instead involves (1) an agreement or promise by the employer to pay severance to an involuntarily-terminated employee, and (2) employer conduct that effectively forces or drives the employee to resign. 

Definition of Good Reason


Reproduced at the bottom of this page are Section 409A tax regulations that address both (1) the events commonly recognized to trigger good reason resignation rights, and (2) certain procedures that the 409A safe harbor requires.  More about 409A


Here is a sample Good Reason definition that tracks the 409A safe harbor:. 

 

  • For purposes of this Agreement, “Good Reason” shall be established if Executive resigns from employment with the Company prior to the end of the employment period as a result of one or more of the following reasons without Executive’s written consent: (i) the Company materially reduces the executive's base salary other than as a result of a company-wide reduction in salaries or reductions in salary of all executive officers of the Company, (ii) the Company materially reduces Executive’s employment duties or responsibilities, or (iii) the Company changes Executive’s place of work to a location more than 50 miles from his most recent primary place of work for the Company, or (iv) the Company fails to comply in any material respect with any of its obligations under this agreement; provided that written notice of Executive’s resignation for Good Reason must be delivered to the Company within 30 days after the first occurrence of any such event, Executive shall allow the Company to cure any such occurrence during the 30 day period after the Company’s receipt of such notice, and Executive resigns within 90 days after the Company fails to cure such occurrence within that 30-day period.


Litigation involving "Good Reason"

For merger-related litigation, see next section

Executive Had Good Reason to Resign  (or may be able to show)

CFO told be had lost Board's trust and should leave

  • DiPietro v. Sipex Corp., 2007 WL 1378440 (Mass.App.Ct. May 14, 2007) (Good Reason issue survives summary judgment dismissal). 
  • Relevant Terms: Good reason included “a material reduction in the Employee’s title or reporting responsibilities as they exist on the date hereof without the Employee’s written consent.” 
  • Plaintiff served as Sipex's CFO, including the period after Sipex became a public company in 1996, he was the second in command of the company, reporting only to the CEO and the Board. He was responsible for managing internal financial reporting to the CEO and the Board, and he was also responsible for managing a significant portion of the company's operations, including facilities, purchasing, and information technology.
  • Plaintiff asserted that a material reduction in his reporting responsibilities was effected when the new CEO told him that the Board no longer trusted him to present complete and accurate data to the Board, and the Board would prefer that he left. The court found this allegation was sufficient to survive dismissal by summary judgment.

Material Change in Duties/Authority

  • Bowles v. Quantum Chemical Co., 266 F.3d 622 (7th Cir. 2002) (affirming district court’s finding that plaintiff was owed severance under Plan due to meaningful diminutions in his job). 
  • Relevant Terms: Severance would be owed for a resignation due to a “diminution of [employee’s] authority, duties, responsibilities or status”. 
  • Quantum employed plaintiff as director of polyolefins research and technology acquisition, a senior-level management position. The court found the following facts supported a determination that plaintiff had good reason to quit following an acquisition of Quantum: (1) the budgets for the research department in general and for the polyolefins research group in particular were reduced by seven figure amounts; (2) a project which took up at least 20% of plaintiff’s time, was terminated; (3) his authority to approve expenditures was reduced substantially, as was the authority of persons reporting to him, which required him to monitor more closely the expenditures of others; (4) an extra layer of management was added between plaintiff and Qauntum’s president; (5) several people who worked for him left the company and were not replaced; and (6) his supervisory position with respect to process modeling was eliminated.


Executive Had Good Reason to Resign  (or may be able to show)

Speculative Bases by Employee. 

  • Worth v. Huntington Bancshares, Inc., 43 Ohio St. 3d 192, 197-98 (1989) (holding there was a triable issue of material fact where employee resigned and questions of good faith remained).
  • Relevant Terms: Severance benefits are payable “in the event that Employee should determine in good faith that his status or responsibilities with the Company or UCB has or have diminished subsequent to a change in control.”
  • Court found that executive’s purported reasons for determining that his status and responsibilities had diminished were both speculative and uninformed. The evidence revealed other reasons for the resignation that undermined his claim of good faith: (1) a desire to leave the banking industry; (2) a desire to return to another state and commence an energy consulting business; and (3) a recognition that his continued employment with the Company would no longer be guaranteed under employment agreement, as the one-year protection provided therein was to end shortly after the day he tendered his resignation. 

Merger-related "Good Reason" Litigation

Additional Information

Executive Had Good Reason to Resign (or may be able to show)

Material Changes Post-closing (6th Cir.)

  • Cambio Health Solutions v. Reardon, 2007 WL 627834 (6th Cir. February 27, 2007) (affirming jury’s finding that plaintiff resigned for Good Reason). 
  • Relevant Terms: Good Reason included “any material change in title, authorities, responsibilities (including reporting responsibilities) which represents an adverse change from his status, title, position or responsibilities.” 
  • Plaintiff was CEO of Cambio, an indirect subsidiary of Quorum Health Resources (“QHR”).  Triad Hospitals Inc. subsequently acquired the parent corporation of QHR. Following the merger, Triad required Plaintiff to report to the CEO of QHR rather than Cambio’s Board of Directors. In addition, employees who previously reported to Plaintiff were instructed to report to Cambio’s new president, who was selected through a hiring process and contract negotiation from which Plaintiff was excluded. 
  • The court concluded that the jury had ample evidence to find that the buyer materially altered plaintiff’s authority. 

Good Reason from Post-Closing Diminution of Duties (7th Cir.)

  • Dabertin v. HCR Manor Care, 7th Cir., in which the 7th Circuit focused on several post-closing job changes that significantly reduced the executive's responsibilities, and recognized that "In any case, the determination of what constitutes a substantial reduction in duties and responsibilities obviously varies greatly based on the specific facts of the particular case and the tasks allotted before and after a job re-assignment.  After considering all of the evidence that the Committee had before it, including the functions, duties, and responsibilities Dabertin lost, as well as those she gained, we conclude, that under a common sense view of the changes in Dabertin's job assignments, the Committee arbitrarily and capriciously denied her benefits. 

Material Changes Post-closing (7th Cir.)

  • Dabertin v. HCR Manor Care, Inc., 373 F.3d 822 (7th Cir. 2004) (executive had good reason to resign because additional duties given to her through the general manager role did not change the fact that her prior functions, duties and responsibilities were reduced).
  • Relevant Terms: Good Reason includes a “significant reduction in the scope of . . . authority, position, title, functions, duties or responsibilities”.
  • Dabertin was Vice President for Operations at the time of acquisition. Following the change in control, Dabertin was given the additional role and title of general manager and was expected to spend significantly more time in the facilities assigned to her and participate more directly in their day-to-day management, while at the same time performing the same functions she performed when she was solely vice president. To accommodate her increased responsibility, the geographic regions for which she was responsible were reduced from two to one division. She went from having oversight authority for 48 facilities to 27, from 34 skilled nursing units to 17 and from 4,639 beds to 2,309. Her budgeted revenue decreased from $232 million to $114 million and her operating profits decreased from $61 million to $27 million. Her independent capital spending authority went from $6 million to zero, and she lost her independent authority to manage her total budget. She no longer had any authority for development and implementation of advertising, public relations, consulting, business meetings, seminars and conventions. The buyer eliminated her construction project authority for 20 sites and eliminated her role in identifying, reviewing, overseeing, and coordinating construction projects. She also lost her management function and hiring/firing authority for 73 staff members.
  • Court found Good Reason for the resignation, however, the court expressly noted that: “In any case, the determination of what constitutes a substantial reduction in duties and responsibilities obviously varies greatly based on the specific facts of the particular case and the tasks allotted before and after a job re-assignment.”

Material Changes Post-closing (ND Ill))

  • Minahan v. LESCO, Inc., 2008 WL 4186924, at *11 (N.D. Ohio Sept. 5, 2008) (granting summary judgment for plaintiff and holding that provisions in employment agreement entitling executive to post-merger severance payment were met, in spite of potential evidence of lack of good faith on the part of the executive, where the terms of the contract were unambiguous and the executive was removed from her role). 
  • Relevant Terms: Good Reason included “the assignment to the Employee of any duties inconsistent in any material respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities.”
  • Court concluded that the Good Reason language: “is very clear on its face as to what will constitute a Triggering Event. The facts undisputably establish that plaintiff was no longer Secretary [to the Board of Directors] of LESCO. Whether or not she was told that her job duties and pay would stay the same, the fact remains that she was no longer an officer.”

Material Changes Post-closing (ND CA)

  • Sluimer v. Verity, Inc., 628 F. Supp. 2d 1099, 1111 (N.D. Cal. 2008), aff'd, 606 F.3d 584 (9th Cir. 2010) (holding diminution of duties was constructive termination).
  • Relevant Terms: The Plan defined a "constructive termination" as a voluntary termination after "a substantial reduction in the Participant's duties or responsibilities."
  • At the time Autonomy acquired Verity, plaintiff was a Senior Vice President for operations in Europe, the Middle East, Africa, and Asia, managing over 100 employees including 10 country managers. Plaintiff “was responsible for overseeing operations generating approximately $50,000,000 in revenue,” he reported directly to Verity's president and CEO, and his responsibility extended to various facets of Verity's business, including sales, marketing, finance, administration, and technical operations. In contrast, the post-acquisition position offered to him would have put him in charge of roughly $5,000,000 in revenue and only 15 employees. The position also would have involved only sales, and would have required plaintiff to report to a general manager rather than the CEO.
  • The court found these differences were undisputed, the defendant could not explain how the two positions could have comparable duties and responsibilities, and that plaintiff suffered a constructive termination. 

Demotion Post-closing (ND OK)

  • Tinkler v. Level 3 Communs., LLC, 2008 U.S. Dist. LEXIS 4953 (N.D. Okl. January 22, 2008) (court found Good Reason for the resignation and overturned the claims administrator’s denial of benefits).
  • Relevant Terms: Good reason includes “a material adverse diminution in Employee's duties or responsibilities; provided, however, that any alteration in Employee's reporting responsibilities or title shall not be deemed a diminution of Employee's duties or responsibilities so long as Employee continues to perform, in the aggregate, materially the same functions and responsibilities for the Company.”
  • Plaintiff claimed that post-acquisition, he had been demoted to a front-line manager when he was previously an upper-level manager with significant responsibilities, two-thirds of his responsibilities had been moved to other departments; and his staff of 34 was cut to 11. While the employer acknowledged that his responsibilities were more limited post-acquisition, the buyer was a much larger organization so there was necessarily more specialization of roles and tasks, and he was given additional responsibilities he did not have previously.
  • The court found that the denial of benefits was not supported by substantial evidence and remanded the matter to the Plan administrator.

Material Changes Post-closing (ND Ill))

  • MAnderson v. Sotheby’s Inc., 2006 WL 1722576 (S.D.N.Y. June 22, 2006) (court found that plaintiff was not offered an equivalent position and granted severance benefits under Plan).  
  • Relevant Terms: Plaintiff was “eligible for severance benefits if not offered an “equivalent position” in which the “job responsibilities and compensation are comparable to his job responsibilities and compensation prior to sale or elimination of business entity.”
  • Plaintiff was Executive Vice President and Regional Manager of the Mid-Atlantic and Tri-State regions for Sotheby’s luxury residence sales division. Following a change in control, buyer transferred Plaintiff to its franchise division, where instead of selling luxury residences to indviduals, he would be selling franchises to brokerages. Plaintiff also claimed his salary would be significantly less than what he was earning previously. The court found procedural irregularities in the claim review process and strongly disagreed with the denial of Plaintiff’s claim for benefits based on the differences in the positions and compensation.

Material Changes from Public-to-Private Role Post-closing (Tenn.)

  • Gray v. Shoney’s LLC, 2006 WL 3093217 (Tenn.Ct.App. October, 31, 2006) (affirming trial court’s grant of summary judgment; plaintiff had Good Reason to resign after change in control). 
  • Relevant Terms: Good Reason included “a significant change in the nature or scope of his authority as an executive” or “there is a reasonable determination by Executive that, as a result of a change in circumstances significantly affecting his or her position, Executive is unable to exercise the authority, powers, function or duties attached to his or her position.”
  • Plaintiff was CIO of Shoney’s Inc., the publicly-traded parent company of Shoney’s Restaurants and Captain D’s Restaurants, and he reported directly to the Chairman of the Board of Directors. Following a change in control, the buyer redeployed Plaintiff and his IT department to a privately-held subsidiary, Captain D’s, and Plaintiff reported to Captain D’s Operations President. The court analyzed the following six undisputed changes in Plaintiff’s duties and in each instance found them to be significant: (1) the loss of authority to initiate or pursue research and development opportunities; (2) the loss of authority to incur expenditures without prior approval; (3) loss of autonomous authority purchase equipment; (4) loss of oversight of customer compliant hotline operations; (5) the redeployment of his department such that he no longer reported to the CEO of the parent company but instead reported to an employee at the subsidiary who was formerly on the same level as he was; and (6) loss of authority to keep employee confidences confidential and direct the manner in which employee terminations were handled.

Required Relocation Post-closing (D. Conn)

  • Stefanelli v. Laboratory Corp. of Amer. Holdings, 2005 U.S. Dist. LEXIS 10332 (D.Conn. May 27, 2005) (finding Good Reason for resignation and entitlement to severance benefits). 
  • Relevant Terms: Good reason includes a “significant change in [employee’s] duties, compensation, or benefits.” 
  • Plaintiff worked for Dianon Systems, Inc. as vice president of national sales and marketing. After LabCorp acquired Dianon, LabCorp first offered him a similar position in LabCorp that would have required him to move from Connecticut to North Carolina. When he gave notice of termination for good reason (his contract also provided for good reason in the event he was required to move more than 60 miles from his home), LabCorp extended him a subsequent offer five months later to remain in Connecticut and run Dianon’s entire operation. Court found that the relocation requirement of the first offer triggered the payment of benefits, and in any event, the subsequent offer was a significant change from his former position as vice president of national sales and marketing.

Material Business Changes Post-closing (TX)

  • Noble Drilling Corp. v. Fulton, 2001 WL 224739 (Tex.App. March 8, 2001) (upholding jury’s determination that good reason termination occurred). 
  • Relevant Terms: Good reason included “significant and material change in the nature or scope of the employee’s duties . . . provided, however, that employee’s title, scope of responsibility and authority may be altered (by reason of demotion, . . .) without constituting good reason.”
  • Plaintiff presented evidence that: (1) before the merger, he was CFO and supervised the “entire capitalization and finances of the company,” but after the merger with the much larger company, he “had nothing to do” and merely filled out paperwork and attended meetings; (2) after the merger, he was told the controller would report to him but the controller bypassed him and dealt directly with the CFO of the parent corporation; (3) before the merger, he participated in the company’s important decisions, whereas following the merger the company’s CEO made most decisions independently and he was “kicked out” of the CEO’s office when he went to see him. The jury found the employer’s failure to pay severance benefits was a breach of the agreement, and the court affirmed.


Executive Did Not Have Good Reason to Resign 

(or claim dismissed as inadequate allegations)

Comparability Established  Post-closing (1st Cir.)

  • Liston v. Unum Corp. Officer Severance Plan, 330 F.3d 19 (1st Cir. 2003) (upholding plan administrator’s denial of severance benefits).
  • Relevant Terms: Severance benefits were owed in the event of a “significant adverse reduction or alteration in the nature and status (other than title) of the officer’s position, duties or responsibilities” after a change in control.
  • The court held that plaintiff’s claim of having to work 20 more hours a week and having increased travel obligations did not constitute proof of diminished responsibility. The plaintiff also argued that she was no longer “responsible for developing and implementing growth and service strategies as well as piloting new work processes.” The court determined that “Statements at this level of abstraction do not make the administrator's ultimate decision ’arbitrary.’” 
  • The court concluded that the plan administrator did not act arbitrarily and capriciously in denying ERISA severance benefits when it held that her new job was “comparable” and required “similar skills and abilities”.No Good Reason if Post-transaction Job is Equivalent (or Better)
  • The 7th Circuit explains that “the question . . . is whether the jobs are comparable, not whether the employer is carrying over the operations unchanged.”  Williams v. Interpublic Severance Pay Plan, 523 F.3d 819, 822 (7th Cir. 2008), affirming denial of executive’s post-acquisition claim for severance benefits; finding Dabertin (above) inapplicable because it involved an “effective demotion,” inapplicable).​ 

Comparability Established Post-closing (3rd Cir.)

  • Bader v. RHI Refractories Am., Inc., 111 F. App'x 117, 121 (3d Cir. 2004) (Upholding summary judgment and holding there was no diminution of duties where only evidence was “plaintiff’s conjecture.”).
  • Relevant Terms: “Any change in duties, responsibilities (including direct reporting responsibilities) or status of the Eligible Employee that is inconsistent in any material and adverse respect with the Employee's position(s), duties, responsibilities or status with the Company immediately prior to such Change in Control (including any material and adverse diminution of such duties or responsibilities.)”
  • Prior to the acquisition, Plaintiff was employed by Harbison-Walker as Director, Worldwide Minerals Processing. Following the acquisition, plaintiff was offered a position with the succeeding company as Director, Worldwide Cement. Plaintiff acknowledged that the position he was being offered was "the same position as he held at Harbison-Walker" and it offered the same salary, reporting structure, and continued in the same product line as Plaintiff’s previous position with Harbison-Walker. The language of the job proposal also expressly stated that the new position would "be consistent with [plaintiff’s] current responsibilities." Plaintiff presented no evidence, other than his personal perceptions and conjectures, of material and adverse changes to his job responsibilities following the acquisition.

Comparability Dispositive, and Established (7th Cir.)

  • Williams v. Interpublic Severance Pay Plan, 523 F.3d 819, 822 (7th Cir. 2008) (holding that employee did not suffer a diminution in duties, where employee’s salary increased and the jobs were comparable after acquisition).
  • Relevant Terms: Severance plan provides executives benefits if they resign following a change of control, unless the new owner offers a "comparable" position at the same salary or higher.
  • The acquiring entity offered the plaintiff the same role – he was a "Senior Vice President, Account Management and Development” at an advertising agency while post-acquisition he would have been “Senior Vice President, Account Management." He claimed that the position would have been inferior because the entity planned to operate an independent agency in Chicago where he worked, while his prior employer operated internationally, and he would have lost prestige as a result. The acquiring entity also worked for smaller clients.  
  • The court held that the question was whether the jobs are comparable, not whether the employer is carrying over the operations unchanged, and affirmed the Plan Administrator’s denial of benefits. 

No Material Changes Post-closing (ED Mo)

  • Boyd v. Conagra Foods, Inc., 2016 U.S. Dist. LEXIS 23660 (E.D. Mo, February 26, 2016) (affirming plan administrator’s decision to deny benefits).
  • Relevant Terms: Good Reason included “(i) a material reduction in the Employee's position, duties or responsibilities; or (ii) a material adverse change in the Employee's reporting relationships.”
  • Prior to the acquisition, Plaintiff’s title was Vice President of Operations. Plaintiff continued working for the buyer after the acquisition with the title of Vice President of Manufacturing. He alleged that the buyer materially altered his job by excluding him from leadership meetings, assigning a project manager to assist with a project over which Plaintiff had responsibility, and hiring a plant manager for a plant he supervised. The court concluded that these changes did not constitute a material alteration of job responsibilities.

No Significant Reduction Post-closing (D. NJ)

  • MAdair v. Abbott Severance Pay Plan, 781 F. Supp. 2d 238 (D.N.J. 2011) (affirming plan administrator’s determination that Good Reason to resign did not exist).
  • Relevant Terms: Good Reason includes “any demotion or other significant reduction in the job responsibilities held by the Participant immediately prior to December 15, 2006, or any significant change to the reporting relationships of the Participant.”
  • Although Plaintiff’s title remained the same after the merger and he continued to report to the same person, part of his unit was transferred elsewhere. The court noted that he assumed new supervisory duties over a similar number of employees and positions. The court concluded that simply because Plaintiff’s job responsibilities changed, does not mean his job responsibilities were significantly reduced.

No Material Changes Post-closing (D MN)

  • MVry v. Martin Marietta Materials, Inc., 2003 WL 297309, at *3 (D. Minn. Feb. 7, 2003) (Trial court found that changes in plaintiff’s responsibilities did not meaningfully or adversely change plaintiff’s job status)
  • Relevant Terms: Good Reason included “meaningful alteration, adverse to the [employee], in the nature and status of his responsibilities or in his position”
  • The plaintiff alleged that the merger brought about changes in his job status, such as a reduction in his authority over subordinates (he needed permission to hire and fire) and in his contact with the company's CEO (he was no longer a direct report) and Board of Directors. In addition, the plaintiff argued that as a result of the merger, the nature of his job changed in two ways: he claimed that he no longer was involved with tasks such as engineering, permitting, and exploration; and he stated that he had responsibility for far fewer projects after the merger.
  • The court concluded that the job changes do not constitute “meaningful changes,” that trigger the good cause provisions of the Change of Control Agreement.
  • The court noted that some of the changes were unavoidable when a large company purchases a smaller entity. The acquiring entity had centralized many of the tasks that the plaintiff had previously handled and those were not correctable and adverse changes contemplated by the Change of Control Agreement.

Triable Issue re Material Changes Post-closing (MA)

  • MCarter v. Warren Five Cents Sav. Bank, 409 Mass. 73, 78-79 (1991) (Reversing summary judgment, holding that there was dispute of a material fact as to whether the executive in good faith believed there had been a diminution in his duties).
  • Relevant Terms: "in the judgment of the Executive (such judgment being exercised in good faith), a significant change in the Executive's responsibilities and/or duties which constitutes, when compared to the Executive's responsibilities and/or duties before the 'change of control' . . ., a demotion."
  • Pre-merger, the plaintiff had been the company’s only senior vice-president. He was responsible for residential real estate lending, including construction lending (which represented about half of the company’s lending activity), commercial lending, commercial real estate, consumer lending, loan servicing and joint ventures. He had approximately thirty-five people reporting to him. 
  • After the acquisition he would be one of four senior vice-presidents and its senior residential lending officer, with responsibility for all residential real estate mortgage loans and construction lending (almost half of the acquiring entity’s pre-merger lending activity), and for four real estate joint ventures. The real estate mortgage loans of the merged banks would total more than the company’s entire loan portfolio, a fact executive did not know when he made his decision. He would have only approximately twelve people reporting to him. Residential real estate lending involves less decision-making than commercial lending. Also, it appeared that the executive did not fully know the details of his proposed new position with the acquiring entity when he resigned on the date the merger was effective. 
  • The court concluded that there were disputed material facts and reversed the trial court’s grant of summary judgment for the plaintiff.  

Not Sufficiently Material Changes Post-closing (ND Ill))

  • MGall v. Liberty Mutual Ins. Group, 2001 WL 290194 (N.D.Ill. 2001) (the court found the plaintiff did not have Good Reason to resign).
  • Relevant Terms: Good Reason includes “your being placed, without your consent, in a position of lesser stature than that of your then outstanding position with the Company or being assigned duties or responsibilities inconsistent with such position” 
  • The plaintiff was employed as Vice President/General Manager by American Ambassador Casualty Company (“AACC”), a subsidiary of Guardian Royal Exchange insurance Group (‘GRE”). She was the highest level employee at AACC, was in charge of 250-300 people, and the Vice Presidents of Claims, Underwriting and Human Resources reported to her. She reported to the Senior Vice President of GRE.  
  • Following the buyer’s purchase of GRE, her position was renamed Regional Vice President, and she lost responsibility for overseeing AACC’s claims, accounting or legal departments and she no longer had authority to sign settlement drafts. It also took her longer to get checks issued, and she had to go through GRE’s corporate offices to get AACC statistics.  
  • The court held that even though plaintiff no longer had direct oversight for claims, accounting and legal departments, and though she lost the ability to sign settlement drafts, the changes did not constitute good reason under the employment agreement because they did not cause her to be in a position of “lesser stature”. The court seemed persuaded by fact that she remained the highest paid employee at AACC, she continued to report directly to GRE’s Senior Vice President and she produced no evidence that AACC’s business decreased or that the number of employees she oversaw diminished. The court also noted that its review of the Plan administrator’s determination was limited to examing if it was “downright unreasonable.”

409A's Definition of "GOOD REASON"

See the text shown below in bold italics.

Treas. Reg. 1.409A-1(n):


(2)  Separations from service for good reason -

     (i) In general. Notwithstanding paragraph (n)(1) of this section, a service provider's voluntary separation from service will be treated for purposes of this section and §§ 1.409A-2 through 1.409A-6 as an involuntary separation from service if the separation from service occurs under certain limited bona fide conditions, where the avoidance of the requirements of section 409A is not a purpose of the inclusion of these conditions in the plan or of the actions by the service recipient in connection with the satisfaction of these conditions, and a voluntary separation from service under such conditions effectively constitutes an involuntary separation from service. Generally such conditions will be prespecified under an agreement to provide compensation upon a separation from service for good reason. Such a good reason (or a similar condition) must be defined to require actions taken by the service recipient resulting in a material negative change to the service provider in the service relationship, such as the duties to be performed, the conditions under which such duties are to be performed, or the compensation to be received for performing such services. Other factors taken into account in determining whether a separation from service for good reason effectively constitutes an involuntary separation from service include the extent to which the payments upon a separation from service for good reason are in the same amount and are to be made at the same time and in the same form as payments available upon an actual involuntary separation from service, and whether the service provider is required to give the service recipient notice of the existence of the condition that would result in treatment as a separation from service for good reason and a reasonable opportunity to remedy the condition.  


       (ii) Safe harbor. For purposes of this section and §§ 1.409A-2 through 1.409A-6, if a plan provides that a voluntary separation from service will be treated as an involuntary separation from service if the separation from service occurs under certain express conditions, a separation from service satisfying the conditions set forth in the plan will be treated as an involuntary separation from the service if the necessary conditions (or set of conditions) require the following:  


              (A) The separation from service must occur during a pre-determined limited period of time not to exceed two years following the initial existence of one or more of the following conditions arising without the consent of the service provider:  

                        (1) A material diminution in the service provider's base compensation.

                        (2) A material diminution in the service provider's authority, duties, or responsibilities.  

                        (3) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the service provider is required to report, including a requirement that a service provider report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation).  

                        (4) A material diminution in the budget over which the service provider retains authority.  

                        (5) A material change in the geographic location at which the service provider must perform the services.  

                        (6) Any other action or inaction that constitutes a material breach by the service recipient of the agreement under which the service provider provides services.  

               (B) The amount, time, and form of payment upon the separation from service must be substantially identical to the amount, time and form of payment payable due to an actual involuntary separation from service, to the extent such a right exists.  

               (C) The service provider must be required to provide notice to the service recipient of the existence of the condition described in paragraph (n)(2)(ii)(A) of this section within a period not to exceed 90 days of the initial existence of the condition, upon the notice of which the service recipient must be provided a period of at least 30 days during which it may remedy the condition and not be required to pay the amount.


INFORMATION ABOUT 409A GENERALLY

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