The IRS has recently provided additional methods for taxpayers to correct certain failures to comply with Code Section 409A. This latest guidance in Notice 2010-6 sets forth methods by which a taxpayer can voluntarily correct certain failures to comply with the plan document requirements under Code Section 409A. This new correction program is intended to encourage taxpayers to review non-qualified deferred compensation plans to identify provisions that fail to comply and to correct those provisions promptly.
Code Section 409A provides that all amounts deferred under a non-qualified deferred compensation plan for all tax years are currently includible in income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless the plan satisfies certain distribution, acceleration of benefit and election requirements and is operated in accordance with them. Noncompliance with Code Section 409A results in the inclusion in income for all amounts deferred under the plan by a participant in the plan, an interest charge and an additional 20% excise tax.
Notice 2010-6 is the second round of correction guidance. Previously, the IRS issued Notice 2008-113 which provided relief from the full application of rules relating to income inclusion and the applicable additional taxes arising out of the failure to comply with Code Section 409A in operation. Notice 2010-6 also clarifies certain aspects of Notice 2008-113.