Earlier this year, the Internal Revenue Service released Notice 2010-6, which offers employers an opportunity to correct nonqualified deferred compensation arrangements that do not comply with Code Section 409A. This guidance permits corrections of several common plan document failures, which, if timely adopted, can avoid the severe adverse tax consequences of 409A violations. See our Benefits Alerts of February 8, 2010, and March 16, 2010.
Early correction of plan document failures is important. Notice 2010-6 includes a transition rule under which eligible plan document failures may be corrected by December 31, 2010, without paying any 409A tax or penalty. (This relief is not extended to operational errors, however, which are subject to Notice 2008-113.) This transition rule is intended to encourage employers to review their nonqualified deferred compensation plans to identify provisions that fail to comply with Section 409A and to correct those plan provisions promptly.
Outside of the correction period defined under this transition rule, if a deferred compensation plan is corrected and the correction affects the operation of the plan within one year, the correction will generally require payment of a reduced penalty (typically 50%) on the amount that would otherwise have been taxed under Section 409A.
Some common 409A provisions will need to be revisited
This new 409A guidance will be helpful to employers who may have overlooked certain deferred compensation arrangements that were not updated to comply with Section 409A by the December 31, 2008, deadline. But even if your plans have been previously reviewed for 409A compliance, you should not disregard this new guidance and opportunity to correct. The Notice provides clarifications regarding some common plan provisions, and the IRS has adopted a new position with respect to employment agreements, severance agreements, and deferred compensation plans that condition payment upon the employee’s execution of a release or other documents, which may require changes to those terms.
What to do now
Notice 2010-6 provides a valuable opportunity for companies that have not yet achieved full documentary compliance with Section 409A to do so with reduced—or even no—adverse tax consequences. Accordingly, employers should arrange for a Section 409A review of their agreements that provide for payment of deferred compensation, such as employment agreements with severance provisions, change in control agreements, and supplemental retirement plans.