- Employee Benefits Tip of the Week: Notice 2010-6 409A Document Failures
- January 15, 2010
- Law Firm: Morris, Manning & Martin, LLP - Atlanta Office
The IRS on Tuesday, January 5, 2010, released Notice 2010-6, which provides “Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with §409A(a).” Code §409A is the provision of the Internal Revenue Code that provides for inclusion in gross income of deferred compensation not yet paid and subjects such deferred compensation to an additional 20% tax if the arrangement providing the deferred compensation doesn’t satisfy certain requirements.
The Notice covers some items generally of interest with respect to Code §409A issues. For example, the Notice provides that if an arrangement provides a payment must be made “as soon as reasonably practicable” (or substantially similar language) following a Code §409A permissible payment event, this wording will generally not necessarily cause the arrangement to fail to satisfy Code §409A document requirements (Code §409A would generally require that, for a payment to be considered made as of a permissible payment event, the payment must be made no later than the last day of the service provider’s taxable year in which the payment event occurred, or, if later, the fifteenth day of the third month following the payment event) if the service recipient doesn’t have a pattern or practice of making late payments that would not qualify as timely under Code §409A.
The Notice also provides that if an arrangement provides for a payment event that could be interpreted to be a Code §409A permissible payment event (for example, providing for a payment upon an “acquisition” or upon a “termination of employment”), this wording will generally not necessarily cause the arrangement to fail to satisfy Code §409A document requirements if the service recipient doesn’t have a pattern or practice of interpreting the language in a manner non-compliant with Code §409A and no court has interpreted the language and the ambiguous language was not intentionally used.
The Notice also provides relief with respect to certain Code §409A document defects. For example, if an arrangement provides for a payment upon an event involving a change in the relationship between a service provider and service recipient which would not qualify as a separation from service under Code §409A, the arrangement may generally be “corrected” before an event would occur that would be a payment event under the arrangement but which would not be a separation from service under Code §409A by amending the arrangement for compliance. Such an amendment must be effectively immediately, and if, within one year following the date of correction, an event occurs that would have required payment under the pre-correction arrangement but which would not have constituted a separation from service under Code §409A, 50% of the amount deferred under the arrangement must be included in income under Code §409A in the year within which such event occurs. Similarly, if an arrangement provides for a payment upon a transaction event that would not qualify as a Code §409A change of control, the arrangement may generally be “corrected” before an event would occur that would not be a Code §409A change of control by amending the arrangement to limit payments in such situations to only such situations that constitute a Code §409A change of control. Such an amendment must be effective immediately, and if, within one year following the date of correction, a transaction occurs that is not a Code §409A change of control but which would have required a payment under the pre-correction arrangement, 25% of the amount deferred must be included in income under Code §409A in the year within which such event occurs.
Under the Notice, corrections may also be possible in situations where payment might be required upon illness or incapacity that doesn’t meet the requirements of a Code §409A disability, where payments may be made during a period following a Code §409A permissible payment event that would not satisfy Code §409A requirements, where payments are conditioned upon the execution of a non-compete agreement or a release of claims, or even where an arrangement has payment events that are not permissible under Code §409A. Corrections may also be possible for arrangements that currently contain no Code §409A permissible payment events, for arrangement that contain payment events contingent upon impermissible service provider or service recipient discretion, for arrangements allowing impermissible payment acceleration, for arrangements with impermissible reimbursement provisions, for arrangements that fail to include a six-month delay for “specified employees,” and for arrangements with impermissible initial deferral election provisions. In some cases, a tax may be required to be paid, but in others, no tax is required to be paid. Also, in some cases, correction must be accomplished by December 31, 2010, in order to avoid paying taxes.
In short, the Notice is certainly worthy of study in the event that a service recipient / employer has discovered that they have any arrangements providing deferred compensation subject to Code §409A that are not compliant with Code §409A, and may provide welcome relief in those instances.