Balser News

IRS Offers Avenues for Plan Sponsors to Correct Mistakes

August 28, 2008

Since 2006, advisers have been focused on getting NQDC plans in compliance with section 409A as transition rules and final regulations were shaped in Washington. When Congress added section 409A to the Internal Revenue Code (IRC), it imposed penalties for failure to comply with the rules, or act in “good faith” as the rules were being hammered out in detail. So, if clients make any mistakes in operating nonqualified deferred compensation. The Internal Revenue Service (IRS) issued guidance about the plan sponsor fixing certain types of NQDC plan problems. Essentially, the new guidance allows employers to correct a problem voluntarily. Now there is a way that companies can avoid having those penalties imposed on executives for the firm’s unintentional mistakes in operating NQDC plans.

The voluntary correction program is detailed in Notice 2007-100. There are strict limitations on when corrections can be made, generally within the same tax year of the error. The Treasury and IRS provided procedures that give companies a means to correct unintentional operational failures to comply with the Code in a timely manner. The American Jobs Creation Act of 2004 (AJCA) addressed several abuses in executive compensation which included deferred compensation arrangements. Section 409A now states that distributions from NQDC plans may be made only after: (1) separation from service; (2) disability; (3) death; (4) a period of time specified in the plan or election; (5) change of control or change in ownership of corporate assets; (6) unforeseeable emergency.

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