Section 409A of the Internal Revenue Code of 1986 for the first time comprehensively codifies the federal income-tax treatment of nonqualified deferred compensation. In general, Section 409A provides that amounts deferred under a nonqualified deferred compensation plan are currently includible in a service provider's gross income to the extent such compensation is not subject to a substantial risk of forfeiture and was not previously included in the service provider's gross income, unless certain requirements are met. Further, noncompliant deferrals are subject to an additional 20 percent tax and additional interest on any related underpayment of taxes. Section 409A is extremely comprehensive and complex, with there being many interpretive issues that remain open, and it is at this point axiomatic that Section 409A has caused substantial consternation in the market.
In response to the request in Notice 2008-113 for suggestions regarding a voluntary program for documentary noncompliance, the Employee Benefits Committee of the Tax Section of the New York State Bar Association on March 25, 2009 submitted a report1 proposing such a program. The report, co-authored by White & Case Partner Andrew Oringer, proposes a "three-pronged program" to remedy documentary noncompliance under Section 409A, as follows:
- the establishment of an approved list of inadvertent and nonabusive documentary compliance failures subject to correction;
- a remedial amendment period to run for a short period of time following creation of a new right or a change to an existing right under a plan; and
- a policy to enforce prospectively future guidance and judicial determinations, and to provide liberal transition relief so that "a higher quality of fairness and orderly compliance with the new rule or rules may be achieved."
It appears to us that the regulators want to be constructive here, and are struggling to come up with a program that appropriately helps taxpayers, without compromising the intent of the statute. The report is "intended to facilitate the establishment of a multifaceted program in a manner that is faithful to Congressional intent..., and that is administrable and does not unduly penalize taxpayers for inadvertent errors..."
The extent to which a possible compliance program may ultimately evolve is still uncertain.