Law Office Report - Spring 2010
Voluntary Correction Program for Deferred Comp Plans
Attorney Ronald T. SkrenesAll non-qualified deferred compensation plans are required to be in operational and documentary compliance with Internal Revenue Code section 409A as of January 1, 2009 or, if later, the date of their establishment. If a plan is not in compliance, amounts that were deferred become currently taxable to the extent the deferred amounts are not subject to a substantial risk of forfeiture. Section 409A also provides that amounts includable in income are subject to two additional taxes: a 20% excise tax and an interest penalty. As a result, failure to comply with the requirements of this section can have severe adverse tax consequences to the employee.
Previously, the IRS issued Notice 2008-113 which established procedures for the correction of some operational failures of deferred compensation plans, but not document failures. In January 2010 the IRS issued Notice 2010-6 which now provides correction procedures for certain types of plan document failures, mostly relating to the time and form of payment. The voluntary correction program is intended to encourage taxpayers to review non-qualified deferred compensation plans to identify provisions that fail to comply with the requirements of section 409A and to promptly correct those plan provisions in order to be in compliance and avoid adverse tax consequences.
If you have not already done so, it is important to review your deferred compensation arrangements (including plans or agreements using different names but deferring compensation) to determine if the arrangement is in compliance with section 409A. If the arrangement does not comply, this new program by the IRS may help to reduce or avoid the section 409A penalties. If you’d like us to help, give us a call.