IRS Releases Long-Awaited Guidance for Correcting Deferred Compensation Plan Documents

The Internal Revenue Service has released its long-awaited guidance
establishing a program for correcting plan documents and agreements
that contain provisions that do not comply with the deferred
compensation rules imposed by Section 409A of the Internal Revenue
Code.  The document correction program provided by Notice 2010-6 is
intended to work in tandem with Notice 2008-113, which provides
guidance for correcting Section 409A operational errors. 

Notice 2010-6 also includes, for the first time, some more formal
guidance on the Internal Revenue Service’s position concerning what
language is necessary to comply with the written plan document
requirements of Section 409A — some of the Agency’s interpretations of
the plan document requirements are surprising.  According to Notice
2010-6, amendments may be required to be made to a number of
nonqualified deferred compensation plans, particularly executive
employment agreements, in order to ensure that they comply with Section
409A. 

Notice 2010-6 provides methods for taxpayers to correct voluntarily
many types of failures to comply with the document requirements
applicable under Section 409A to nonqualified deferred compensation
plans and thereby avoid or reduce the current income inclusion and
additional taxes under Section 409A.  Notice 2010-6 provides:

• Clarification that certain language commonly
  used in plan documents will not cause a document failure (e.g., “as
  soon as practicable” or substantially similar language following a
  permissible payment event).

• Relief permitting correction of certain
  document failures without current income inclusion or additional taxes
  under Section 409A, provided, in certain circumstances, 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.

In addition, Notice 2010-6 provides significant transition relief to correct plan document errors in 2010.  If a

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