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IRS Publishes Correction Procedures for 409A Document Failures

    Client Alerts
  • January 08, 2010

In Notice 2010-6, the Internal Revenue Service provides guidance on correction of certain failures to comply with the document requirements applicable to nonqualified deferred compensation plans under Code §409A.  Correction according to these procedures will reduce and, in cases where the corrected provision does not affect plan operation within one year following correction, may eliminate, income inclusion and additional taxes for affected employees. 

Correction generally is not available if the employer or employee is under audit for any year during which a document failure occurred.  An employer making a correction must correct all similar failures under plans of the same type, and correction generally is not available for linked plans, where time or form of payment is determined under a different qualified or nonqualified plan.

The Notice provides for correction by plan amendment in specified situations, including impermissible definition of a separation from service; impermissible payment periods and/or payment events; impermissible employer or employee discretion with respect to the payment schedule following a permissible payment event; impermissible reimbursement of in-kind benefits; failure to include the 6-month delay for specified employees; and provisions for impermissible initial deferral elections.  It also clarifies that certain language commonly included in plan documents will not cause a document failure.  For example, language providing for payment "as soon as practicable" after a permissible payment event generally will be construed to provide for payment on the date of the permissible payment event. 

Operational failures that result from a document failure also must be corrected in accordance with Notice 2008-113 (see earlier article), which is clarified in certain respects by this Notice. 

An employer that makes a document correction must attach a statement including specified information to its tax return for the applicable year.  The employer must provide a similar statement to affected employees, who in turn must attach the statement to their tax returns.

An employer that suspects that its nonqualified plan documents include errors should take steps to correct them as soon as possible under this Notice in order to limit the income tax consequences to affected employees.