IRS Explains How to Fix 409A Document Woes

Notice 2010-6 said the program is intended to help taxpayers avoid or reduce the current income inclusion and additional taxes under Section 409A.

“This 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 Section 409A and Section 1.409A-1(c) of the Income Tax Regulations (a document failure), and to correct those plan provisions promptly, while also not providing an advantage to taxpayers participating in plans that initially fail to comply with Section 409A over taxpayers participating in plans drafted in compliance with Section 409A,” the IRS said in the document.

The tax agency said the new notice includes:

• a clarification that certain language commonly included in plan documents will not cause a document failure;
• relief allowing correction of certain document failures without current income inclusion or additional taxes under 409A, provided, in certain circumstances, that the corrected plan provision does not affect the operation of the plan within a year following the date of correction;
• relief limiting the amount currently includable in income and the additional taxes under 409A for certain document failures if correction of the failure affects the operation of the plan within one year following the date of correction; and
  
• transition relief allowing corrections of certain document 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, 2008-51 IRB 1305, by December 31, 2010.

While the new notice is intended to focus on document failures, the tax agency said Notice 2008-113 remains in effect to address voluntarily fixing 409A operational problems.

The new IRS notice is available here.