A separation from service triggers payout of benefits for participants in NQDC plans. A separation from service is any event that causes you to no longer be employed by your company or provide services for the company. This could be for job loss, retirement, or death. The 409A rules dictate when a termination of employment is considered a separation from service, such as when you provide services at no more than 20% of the average level of the prior 36 months.

The tax law requires your plan to have strict distribution rules for these situations to prevent abuses in the triggering of payouts. To comply with 409A, your plan must use the phrase “separation from service” rather than the usual “termination of employment.” For more on this topic, see the section of this website on job loss.