IRC § 409A - IRS Relief and Voluntary Correction Program

2/4/2010

The following is a brief summary of the basic concepts of Internal Revenue Code § 409A adopted as part of the American Jobs Creation Act of 2004.

IRC § 409A covers many types of compensation arrangements, including traditional deferred compensation plans and employment agreements that provide for severance pay or other post-employment benefits.

a. General. IRC § 409A requires generally (subject to certain exceptions) that elections to defer compensation must be made before the beginning of the calendar year in which services will be performed (not the calendar year of payment). In addition, under IRC § 409A, deferred compensation may be paid only upon certain of the following payment events:


b. Noncompliance Penalty. The penalties for noncompliance with IRC § 409A are significant. If an agreement fails to comply, the service provider (i.e., the employee or independent contractor) will incur the following penalties:




a. General. On January 5, 2010, the Internal Revenue Service issued Notice 2010-6. Notice 2010-6 permits employers to correct certain plan document failures of a nonqualified deferred compensation plan, to comply with IRC § 409A and provided certain substantive guidance on IRC § 409A compliance. Notice 2008-113 addresses the correction of certain operational failures under IRC § 409A and remains in effect. Notice 2010-6 primarily addresses the correction of inadvertent and unintentional plan document failures and provides relief limiting the amount currently includible in income and the additional taxes (i.e., 20% tax plus premium interest) under IRC § 409A for certain document failures that are properly corrected. Notice 2010-6 includes a transition rule whereby certain IRC § 409A plan document failures may be corrected by December 31, 2010 without having to pay any IRC § 409A tax or penalty.

b. Information and Reporting Requirements. To correct a document failure under Notice 2010-6, the employer must attach a proper statement to its timely-filed (including extensions) federal income tax return for its taxable year in which it corrects the failure.

The employer must also provide a proper statement to each affected employee no later than the January 31st following the calendar year in which it corrects the failure (and for the subsequent calendar year to the extent an affected employee is required to include an amount in income during that subsequent year).

The employee must attach to his or her federal income tax return a copy of the statement he or she received from the employer with respect to each failure.


Employers should carefully review Notice 2010-6 and determine whether any plan document correction is necessary. Employers are also well-advised to review operational compliance of its IRC § 409A plan. Often, IRC § 409A plan document failures result in operational errors correctible under Notice 2008-113. If correction is necessary, the earlier the document is corrected the better as relief is not available if the service provider or service recipient are under examination by the IRS.



If you have any questions about IRC § 409A or your deferred compensation plan or if you want to discuss adopting a deferred compensation plan, please feel free to contact either Robert P. Abdo, 612-336-9334, rabdo@lommen.com or Thomas F. Dougherty, 612-336-9330, thomas.dougherty@lommen.com.



Thomas Dougherty is a shareholder with Lommen, Abdo, Cole, King & Stageberg, P.A. representing start-up and established businesses, entrepreneurs and individuals regarding a broad range of issues relating to business acquisitions and dispositions, commercial transactions and contracts, the Uniform Commercial Code, commercial lending, the formation, organization, governance and taxation of corporations, nonprofit organizations (including foundations), limited liability companies and partnerships, business relationship documents such as shareholder agreements, operating agreements, member control agreements, partnership agreements, joint venture agreements, employment agreements and consulting agreements and real estate transactions (including like kind exchanges). He also counsels clients with respect to nonqualified executive compensation arrangements, including deferred compensation, stock option, restricted stock, phantom stock and other types of nonqualified plans and arrangements. In addition, Mr. Dougherty counsels entrepreneurs and family business owners on business succession planning and other tax planning strategies.

Robert Abdo is a shareholder of Lommen Abdo. He brings a wide variety of background and experience giving him a practical and substantive perspective to advise clients. Bob represents start-up, emerging and growing private and publicly held businesses. He provides legal and business strategy and advice to varied businesses and individuals in connection with business and other planning, including mergers, sales and acquisitions, real estate, contracts, employment, securities, financing and estate planning. He is a frequent lecturer and author on business subjects. He has represented numerous corporations and organizations in connection with executive compensation plans including unfunded deferred compensation plans, collateral and endorsement split dollar agreements and other plans and arrangements.