Executive Departure Planning: What Happens to Your Compensation When You Leave

Leaving a C-suite role — whether by resignation, negotiated exit, or acquisition-driven restructuring — sets off a chain of tax and legal deadlines across every element of your compensation simultaneously. Your NQDC account triggers a distribution schedule locked in years earlier. Your ISOs start a 3-month countdown before they convert to NQOs. Your unvested RSUs may forfeit entirely or accelerate depending on plan terms. Your severance is ordinary income subject to FICA.

The executives who handle departure well plan the details before their last day. The ones who don't discover missed ISO exercise windows, unexpected NQDC distribution timing that creates a $400K tax spike, or 10b5-1 plans that were never properly closed.

This guide walks through each comp element and what departure triggers for each.

NQDC deferred compensation: the 409A separation-from-service clock

Your NQDC account doesn't distribute on the schedule you wanted — it distributes on the schedule you elected, which is locked in under Section 409A. Departure triggers the "separation from service" distribution event, one of the six permissible 409A payment triggers.¹

Under the Treasury regulations, a separation from service occurs when you and the company reasonably anticipate either:

• No further services will be performed, or
• The level of bona fide services will be reduced to no more than 20% of the average level of services in the prior 36 months

A reduction below 50% of prior service level is presumed to be a separation from service; above 50% is presumed not to be. This matters for executives who transition to board seats or consulting arrangements after an exit — the level of ongoing services determines whether a 409A separation has occurred.

The 6-month specified employee delay

If you are a specified employee — generally meaning you are among the top 50 highest-compensated officers of a publicly traded corporation — distributions triggered by separation from service cannot begin for 6 months after your departure date.¹ This is IRC § 409A(a)(2)(B)(i).

The 6-month delay applies even if your election specified "lump sum at separation." The plan will accumulate the distributions that would have been paid months 1-6 and deliver them as a single lump sum on month 7 (or, if earnings-credited during the delay, on a schedule beginning then).

The 6-month delay is mandatory and cannot be waived. Plans at private companies don't face the specified-employee restriction, but the 409A rules on election changes (requiring re-election at least 12 months before the distribution event) still apply.

Re-deferral is not available after departure

Once a separation from service has occurred, you cannot re-elect a new distribution schedule for that balance. The 409A rule allowing a one-time re-deferral (with 12 months' advance notice and a 5-year minimum extension) expires when the event is within 12 months. Executives who want flexibility over post-departure distribution timing must have elected the installment schedule before their final separation year.

Incentive stock options: the 3-month window

ISOs are highly time-sensitive at departure. Under IRC § 422(a)(2), an option only qualifies as an ISO if it is exercised while the holder is an employee, or within 3 months of the last day of employment.² Exercise after that 3-month window converts the option to an NQO — you lose the long-term capital gain treatment on the spread and owe ordinary income instead.

The 3-month window starts on the day employment ends, not when the company issues a formal separation notice or pays final compensation. If you leave July 1, you have until October 1 to exercise any vested ISOs and preserve their ISO status.

Disability exception: If you terminate employment due to disability within the meaning of IRC § 22(e)(3), the post-termination exercise window extends to 12 months.²

Death: The estate inherits vested options with no automatic conversion. The plan document governs exercise rights; many plans allow 12 months post-death.

Deciding whether to exercise ISOs before departure

If your vested ISOs are deeply in-the-money, the departure decision forces a choice you can't defer:

• Exercise before or within 3 months: Preserve ISO treatment. The spread becomes an AMT preference item. If you then sell within the qualifying period (1 year from exercise, 2 years from grant), you pay LTCG on the full gain. If stock drops post-exercise, the AMT you owe may exceed the value of the shares — the classic AMT trap. See the full analysis at ISO Stock Options and the AMT.
• Don't exercise (or exercise after 3 months): Options become NQOs. Exercise creates ordinary income equal to the spread. Simpler tax treatment, no holding-period requirement for capital gains treatment from exercise date forward, no AMT exposure. Often the right choice when the spread is large and you can't confidently hold through the required qualifying periods.

The cash or concentration risk from exercising a large ISO tranche is real. A $1M ISO spread requires exercise payment of the strike price (e.g., $100K on $1/share options for 100,000 shares) plus AMT exposure — often another $200-300K in cash out of pocket. Plan this before your last day, not after.

Non-qualified options: plan terms govern

NQOs are not subject to the ISO 3-month rule — their post-termination exercise window is set by the plan document. Common timeframes:

• 90 days (most common for rank-and-file; often the same for executives at companies that haven't tailored plans)
• 1 year (increasingly common, particularly for CEO/CFO level)
• Full original term (rarest; sometimes extended at board discretion)

Read your award agreement and plan document. Most companies will not remind you, and expiration is generally not recoverable.

RSUs: vesting stops, but what accelerates?

Unvested RSUs typically forfeit on separation from service. What doesn't forfeit depends on your award agreement's acceleration provisions:

RSU settlements that occur after departure (because the vesting date was post-departure but the plan allowed continued vesting) are still ordinary income in the year of settlement, subject to FICA and withholding. The employer will issue a W-2 or 1099-MISC depending on whether employment has ended — get clarity on reporting before year-end.

Severance: ordinary income, 409A complications

Severance is wages. IRS Publication 15 (2026) confirms that severance pay is subject to federal income tax withholding, Social Security and Medicare taxes, and FUTA.³ There are no special reduced rates for large severance payments; the entire amount is ordinary income in the year paid.

409A and deferred severance

If your severance is paid over time (12 months of salary continuation, for example), you need to confirm whether the arrangement qualifies for the "short-term deferral" or "separation pay plan" exceptions under 409A:

• Short-term deferral exception: Payments made by March 15 of the year following separation are generally outside 409A entirely.
• Involuntary separation pay exception: Salary-continuation plans that pay within 2× annual compensation (and within 2 years of separation) typically qualify as exempt separation pay plans under 26 CFR § 1.409A-1(b)(9).
• Payments exceeding these limits: Require full 409A compliance — including the 6-month delay if you're a specified employee at a public company.

Many severance agreements are drafted without the company confirming 409A compliance. Review before signing.

280G and involuntary termination at change-of-control

If your departure is tied to an acquisition, your severance, accelerated RSUs, NQDC distributions, and any other payments triggered by the change-of-control may all be counted as "parachute payments" for § 280G purposes. If the total exceeds 3× your base amount, the excess is subject to a 20% excise tax under § 4999 — with no deduction for the company on the excess. The 280G Calculator lets you model whether a cutback to 2.99× produces a better after-tax result.

Benefits: COBRA and executive supplements

Termination of employment is a COBRA qualifying event. You and covered family members are entitled to 18 months of continuation coverage for group health, dental, and vision — at up to 102% of the full group premium.⁴ For an executive who was on an employer-sponsored plan, this commonly runs $2,000–$5,000/month depending on family size and plan tier.

Executive-specific supplemental benefits — excess liability umbrella coverage under the company policy, executive health concierge programs, supplemental life insurance — typically terminate on the last day of employment. These are not continuation-eligible under COBRA. Confirm which benefits you need to replace personally before your final day.

10b5-1 plan: close it properly

If you are a Section 16 officer and have an active 10b5-1 trading plan, departure from the company ends your status as an insider but not the obligation to handle the plan properly:

• A plan adopted while you were an insider cannot be extended or modified post-departure without careful analysis
• Trades scheduled after departure that occur while you're still within a blackout period may create liability
• Coordinate with the company's General Counsel and your securities counsel to terminate the plan or confirm that remaining scheduled trades are permissible

See the full framework at 10b5-1 Plans for Executives.

1. IRC § 409A(a)(2)(B)(i) and Treas. Reg. § 1.409A-3 — separation from service definition, 6-month specified employee delay requirement, distribution timing rules. law.cornell.edu/uscode/text/26/409A. Specified employee definition: § 416(i) without regard to paragraph (5); applies to the 50 highest-compensated officers of a publicly traded corporation.
2. IRC § 422(a)(2) and Treas. Reg. § 1.422-1 — ISO must be exercised within 3 months of termination of employment to retain ISO status; 12-month window for disability under § 22(e)(3). law.cornell.edu/uscode/text/26/422.
3. IRS Publication 15 (Circular E, 2026) — severance pay is subject to income tax withholding, Social Security and Medicare taxes, and FUTA. irs.gov/publications/p15.
4. COBRA Continuation Coverage, U.S. Department of Labor EBSA — 18-month continuation period for termination of employment qualifying events; 102% premium maximum. dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra.

409A rules per IRC § 409A and Treas. Reg. § 1.409A-3. ISO post-termination window per IRC § 422(a)(2), unchanged. Severance tax treatment per IRS Pub. 15 (2026). COBRA per ERISA § 601-608, unchanged. Values and rules verified April 2026.