<nobr>Jan 12, 2010</nobr>

IRS Releases Guidance on Correcting Failures under Section 409A

The Internal Revenue Service has released Notice 2010-6, providing guidance and relief on corrections of certain failures of a nonqualified deferred compensation plan to comply with the requirements of section 409A of the Internal Revenue Code. Specifically, Notice 2010-6 permits taxpayers to correct certain failures under section 409A to comply with plan document requirements or, in certain circumstances, to limit the amount includible in income and additional taxes under section 409A as a result of the plan document failure. The Notice also clarifies certain aspects of Notice 2008-113, which addresses failures of 409A plans in operation.

Notice 2010-6 provides the following:

• Clarification that certain language commonly included in plan documents will not cause a document failure;


• Relief permitting correction of certain document failures without current income inclusion or additional taxes under section 409A, provided that the corrected plan provision does not affect the operation of the plan within one year following the date of correction;


• Relief limiting the amount currently includible in income and the additional taxes under section 409A for certain document failures if correction of the failure affects the operation of the plan within one year following the date of correction;


• Relief permitting correction of certain document failures without current income inclusion or additional taxes under section 409A, if the plan is the service recipient's first plan of that type (disregarding any plans not subject to section 409A or any plans under which all deferred amounts have previously been paid or forfeited) and the failure is corrected within a limited period following adoption of the plan; and


• Transition relief permitting corrections of certain document failures without current income inclusion or additional taxes under section 409A, if the document failure is corrected by December 31, 2010, and any operational failures resulting from the document failure are also corrected in accordance with Notice 2008-113 by December 31, 2010.

Notice 2010-6 also clarifies certain aspects of Notice 2008-113, including clarification of:

• The application of the subsequent year correction method to late payments of amounts deferred;


• The calculation of the amount that must be paid to the service provider as a correction of a late payment of an amount deferred under a plan if the payment would have been made in property, such as shares of stock; and


• The calculation of the amount that must be repaid by the service provider as a correction of an early payment of an amount deferred under a plan if the early payment was made in property, such as shares of stock.

Questions or comments on this issue should be addressed to Kathryn Ricard (kricard@eric.org).

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Notice 2010-6

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