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409A Relief for Nonqualified Deferred Compensation Plan Document Failures

January 20, 2010

The IRS has issued a notice providing methods by which employers who have nonqualified deferred compensation plans may voluntarily correct specific types of failures to comply with plan document requirements under Code Section 409A and, in some cases, avoid or reduce the amount includible in a plan participant’s income and additional taxes under 409A.

Section 409A generally provides that, unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. Amounts includible in income under 409A are subject to a 20% additional tax and an interest charge.

The document correction program is intended to encourage taxpayers to review nonqualified deferred compensation plans to identify provisions that fail to comply with the requirements of 409A and to correct those plan provisions promptly.

Taxpayers are eligible for relief under this notice if they meet specific requirements. The relief provisions apply only to inadvertent and unintentional failures to comply with the document requirements under 409A. The relief is not available if the failure is intentional or if it is directly or indirectly related to participation in a listed transaction under Reg. § 1.6011-4(b)(2). Additionally, the relief only applies if the service recipient takes commercially reasonable steps to identify and correct all nonqualified deferred compensation plans that have a substantially similar document failure. Relief is generally not available for a taxpayer participating in a nonqualified deferred compensation plan if the taxpayer’s or the employer’s federal income tax return is under examination with respect to nonqualified deferred compensation for any tax year in which the document failure existed.

The notice explains correction procedures for specific failures of document compliance. Examples include:

  • Correction of plan terms that are ambiguous or undefined
  • Correction of plan terms that use definitions that are impermissible under 409A
  • Correction of certain impermissible payment events and payment schedules
  • Correction of failure to include six-month delay of payment for specified employees

The notice also provides transition relief permitting corrections of certain documents failures without current income inclusion or additional taxes under 409A if the document failure is corrected by December 31, 2010, and any operational failures resulting from the document failure are also corrected in accordance with Notice 2008-113 by December 31, 2010.

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