On January 5, 2010, the Internal Revenue Service responded to the long-standing call from the employer and practitioner communities to provide a program under which service recipients (generally, employers) could correct deficiencies in documents governing plans that provide for a deferral of compensation subject to the requirements of Section 409A of the Internal Revenue Code without being subject to its onerous tax penalties.

Notice 2010-6 (the “Notice”) sets forth a limited voluntary correction program for plan provisions that do not comply with Section 409A (i.e., “document failures”). The release of the Notice is timely, as the IRS has recently announced an enhanced audit initiative that will focus on, among other things, compliance with Section 409A.

This GT Alert describes the fundamental principles of this correction program and sets forth recommendations that employers should consider to avail themselves of the relief afforded under the Notice.


Section 409A applies to amounts deferred or that become vested on or after January 1, 2005. Because of the extreme complexity of the rules of Section 409A and the related Treasury regulations, transition relief delayed full compliance with the requirements of Section 409A until January 1, 2009.

Section 409A created significant limitations governing the elections to defer compensation under a nonqualified plan and the times at which deferred compensation can be paid. For these purposes, “nonqualified deferred compensation” is defined very broadly and encompasses not just traditional deferred compensation plans but any arrangement under which compensation may be paid in a year after the year in which the individual’s legally binding right to this compensation is created. Thus, arrangements such as bonus plans, long-term incentive plans and employment agreements may be subject to the requirements of Section 409A.

Failure to comply with these requirements results in the imposition of substantial tax penalties on the service provider (generally, an employee) who has a right to receive the deferred compensation — including inclusion in income of all amounts deferred under the plan on the earliest date on which they are not subject to a substantial risk of forfeiture, an additional tax representing interest on the amount of tax that would have been paid if the amounts were included in income at the time they were originally deferred or vested, and a penalty tax of 20 percent of the amount deferred under the plan. In addition, the amounts required to be included in income as a result of a violation of Section 409A are treated as wages (to the extent the service provider is an employee). Thus, employers risk exposure to penalties if a violation occurs and affected amounts are not handled properly under the applicable reporting and withholding requirements of the Code.

Compliance with Section 409A is required both in the operation of the deferred compensation plan and in the form of the document governing the plan under which the compensation is deferred. Previously, the IRS established a voluntary correction program — most recently in Notice 2008-113 — for violations occurring in the operation of plans subject to Section 409A. Until the issuance of the Notice, however, there has been essentially no ability for employers to correct plan documents that may contain provisions that do not comply with Section 409A.

The Notice  

The Notice grants relief for a variety of document failures provided that certain requirements are satisfied. Specifically:

  • the employer and employee must satisfy general eligibility requirements;
  • the document failures must be corrected in accordance with the procedures established under the Notice for the specific type of document failure; and
  • the employer and employee must satisfy the applicable information and reporting requirements.

General Eligibility Requirements

Regardless of the document failure, the relief provided under the Notice is available only if certain conditions are met, including:

  • the employer must take commercially reasonable steps to identify all other plans that have a document failure that is substantially similar to the document failure initially identified and must correct all of these failures in a manner required under the Notice;
  • the federal income tax returns of the employer and of the affected employee must not be under examination with respect to nonqualified deferred compensation for any taxable year in which the document failure existed; and
  • the document failure must not relate to plans that are linked to other plans (unless the failure is corrected before the end of 2011) or to the provision of stock rights (i.e., stock options and stock appreciation rights).

Correction Procedures

The Notice articulates the IRS’s position that certain ambiguous plan payment provisions (such as the use of the term “termination of employment” rather than “separation from service,” or specifying that payment be made “as soon as practicable” after an event occurs) will not be considered a violation of Section 409A, provided that the plan provision is and has been consistently interpreted and implemented in a manner that complies in operation with Section 409A. In addition, the Notice establishes specific correction procedures for five types of document failures:

  • Impermissible Definitions of Otherwise Permissible Payment Events. To the extent that a plan subject to Section 409A permits payment upon a separation from service, a change in control event or the employee’s disability, the plan’s definitions of any of these payment triggers must ensure compliance with the rules applicable to these triggers under the Treasury regulations. Even if the plan is always administered in a way that satisfies Section 409A, the absence of specificity in the plan document can be treated as a violation.
  • Impermissible Payment Periods Following a Permissible Payment Event. Section 409A generally requires that payment occur within a limited time following the occurrence of the event triggering payment. Even if payment is made within the required time frame, if the terms of the plan document permit payment outside of that time frame, the plan does not comply with Section 409A. This situation could arise from the specification of an impermissible payment period or the conditioning of the payment on employee action — most notably, the requirement that an individual execute a release to receive payment.
  • Certain Impermissible Payment Events and Payment Schedules. The Notice also addresses plan provisions that violate Section 409A by: (i) permitting payment in connection with an event that is not one of the six payment triggers allowed under Section 409A; (ii) impermissibly permitting multiple times or forms of payments with respect to a single payment event; (iii) providing discretion to the employee or employer to change the time or form of payment following a permissible payment event; (iv) granting the employer the discretion to accelerate the timing of payment events; or (v) providing reimbursement or in-kind benefits in a manner that does not comply with the applicable regulations.
  • Failure to Include Six-Month Delay of Payment for Specified Employees. The Notice specifically addresses the failure of a plan of a public company to incorporate the required six-month delay in payment of deferred compensation triggered by the separation from service of a “specified employee” (i.e., generally, one of the 50 highest-paid officers of the corporation, a five-percent owner of the employer, or a one-percent owner earning at least $150,000).
  • Provisions Providing for Impermissible Initial Deferral Elections. Section 409A generally requires that an employee’s initial deferral election with respect to deferred compensation be made no later than the end of the employee’s taxable year before the year in which the services giving rise to the amounts to be deferred are performed. The Notice permits the correction of plan provisions that fail to comply with these deferral election rules.

The relief afforded by the Notice is, of course, conditioned upon the plan’s being amended to bring it into compliance with the requirements of Section 409A. (As noted above, the general eligibility rules of the Notice require that all substantially similar plans with the same defect be appropriately amended.) The Notice sets forth, in some cases, complex rules governing the manner in which the plan or plans must be amended.

Relief Afforded Under the Notice

The extent of the relief afforded by the Notice in any particular case depends on the actual circumstances that may have occurred before the corrective amendment is adopted or that may occur within one year after the plan is amended.

  • In many cases, the relief afforded by the Notice is total — i.e., no income inclusion or penalty is required as a result of the inclusion of an impermissible provision in the plan.
  • To the extent that the provisions of the plan before being amended resulted in a payment or deferral that violated Section 409A, the income inclusion required, and penalty taxes imposed, by Section 409A apply, unless the payment or deferral is eligible for correction, and is appropriately corrected, under the provisions of Notice 2008-113.
  • Most notably, the Notice provides only partial relief if, within one year of the date on which the plan is amended, an event occurs that either (1) would have triggered payment under the terms of the plan before its amendment but not under the terms of the amended plan, or (2) would not have triggered payment under the unamended plan but does trigger payment under the terms of the amended plan. In such a case, 50 percent of the amount deferred under the plan must be included in income, and the amount will be subject to the 20-percent penalty tax, but not the additional interest-based tax, imposed under Section 409A.

Reporting Requirements

As is the case under Notice 2008-113, one unattractive aspect of obtaining the relief afforded by the Notice is that parties taking advantage of the relief must report that fact to the IRS. Specifically, the employer and the affected employee must each attach statements to their respective tax returns that set forth the nature of the document failure and identifying information with respect to the plan and its participants.

Transition Relief

On the other hand, the Notice does provide some helpful transition relief. Perhaps the most significant aspect of the Notice is that document failures that are corrected on or before December 31, 2010 will not require the inclusion of any amounts in income solely as a result of the document failure — even if an event occurs within one year of the correction that would have triggered a 50-percent income inclusion under the general relief principles, as described above. If, however, either (1) any payment is made on or before December 31, 2010 that would not have been made under the amended plan provision, or (2) any payment is not made on or before December 31, 2010 that would have been made under the amended plan provision, the payment or the failure to make payment must be treated as an operational failure and corrected under the provisions of Notice 2008-113.

Similarly, no income inclusion will be required with respect to a document failure that is corrected within a limited period after a legally binding right to deferred compensation is first created under the plan or under any other plan that would be required to be aggregated with the plan for purposes of Section 409A. In addition, the Notice provides some limited transition relief through 2011 for corrections of other specific document failures.


For several reasons, we strongly urge employers to identify all arrangements that may be subject to Section 409A. First, as noted above, the IRS has announced an enhanced audit initiative regarding compliance with Section 409A. Second, the relief afforded by the Notice is unavailable for employers or employees who are under examination with respect to deferred compensation issues. Third, the full relief under the Notice is generally available in all cases only for document failures corrected before the end of 2010. Once arrangements potentially subject to Section 409A have been identified, employers should consult with counsel to review the relevant plan documents to ensure that they comply with the Section 409A requirements. In particular, employers should focus on any employment agreements they have in effect and any forms of document they use in connection with negotiated separations.

Employers should not assume that any reviews they have previously undertaken are in all cases sufficient. Although the Notice does not purport to establish new rules with respect to the documentary requirements of Section 409A, the IRS has not previously issued guidance that dealt specifically with all documentary requirements. Nevertheless, several of the examples included in the Notice seem to indicate that the IRS may be looking for greater specificity regarding plan operations than employers may have felt necessary to include in these documents.