The IRS recently announced a new limited scope Section 409A audit initiative. The IRS said the project will be conducted through standard "information document requests" and will focus on three broad issues: initial deferral elections, subsequent deferral elections, and payouts under Section 409A (including compliance with the six-month delay for specified employees). To limit the burden on the audited companies, the IRS said the scope of the audit will focus on the top ten highest paid employees at the audited companies, and will be limited to the deferral elections and distributions for the years under examination. While fewer than 50 companies will be participating in the audit initiative, we expect that this is the first step towards the development of a broader IRS compliance project.
In light of increasing enforcement, employers should seriously consider self-auditing their existing deferred compensation arrangements to address operational and document compliance issues. We recently presented a webinar titled the Top Ten Most Common 409A Pitfalls. This example-based webinar helps employers identify common documentary and operational compliance issues, including those that are the focus of this limited scope audit initiative. You can view the webinar here.
Many types of problems can be corrected under the IRS' 409A correction programs (one for plan document problems and one for operational compliance problems). However, once an employer or executive is under an IRS audit for these issues, these programs are generally not available.
We recommend that employers take this opportunity to review their deferred compensation plans and arrangements for compliance with Section 409A.