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Guest Article

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(From the December 13, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

More Code § 409A Correction Guidance Is Issued

The IRS issued more guidance regarding the correction of certain form and operational failures of nonqualified deferred compensation plans under Code § 409A. Amounts deferred under a nonqualified deferred compensation plan are includible in income unless the plan complies with the Code § 409A requirements. The new guidance, Notice 2010-80, modifies earlier Notices 2008-113 and 2010-6.

As explained more fully below, Notice 2010-80 makes the following changes to prior guidance:

  • Linked Plans - Clarifies that the types of plans eligible for relief under Notice 2010-6 include a nonqualified plan linked to a qualified plan or another nonqualified plan, provided that the linkage does not affect the time and form of payments under the plans.
  • Stock Rights - Expands the types of plans eligible for relief under Notice 2010-6 to include certain stock rights that were intended to comply with the requirements of § 409A, rather than the exception for certain at-the-money stock rights over service recipient stock.
  • Method of Correction - Provides an additional method of correction under Notice 2010-6 for certain failures involving payments at separation from service dependent on service provider actions (e.g., a requirement to submit a release of claims or similar document), and provides transition relief with respect to failures that were in effect on or before December 31, 2010.
  • Information Reporting - Provides relief from information reporting by both service providers and service recipients with respect to operational failures corrected in the same year.

Prior Guidance

Notice 2008-113 updates and, for periods beginning on or after January 1, 2009, replaces prior guidance providing relief for certain § 409A operational failures. If all of the eligibility requirements are met, corrections are available with respect to these operational failures:

  • Early payments and failed deferrals;
  • Failure to delay distribution of deferred compensation;
  • Excess deferrals; and
  • Discounted stock options and stock appreciation rights.

Notice 2010-6, released in January 2010, provides methods for taxpayers to voluntarily correct certain types of failures to comply with the document requirements of § 409A. Notice 2010-6, in part, modifies Notice 2008-113. The notice provides retroactive relief as well. If a plan document failure is corrected on or before December 31, 2010, the plan may be treated as corrected as of January 1, 2009, for purposes of applying relief in the notice.

Linked Plans

Notice 2010-80 modifies Notice 2010-6 by clarifying that certain linked plans with plan document failures are eligible for relief otherwise provided under Notice 2010-6, provided that the link between the plans merely changes the amount payable under the plan, but not the time or form of payment.

Stock Rights

Notice 2008-113 provides some correction allowing repricing of discounted stock rights. Notice 2010-6 generally precludes any relief for stock rights. Notice 2010-80 clarifies that provision. It provides that stock rights are eligible for relief if they were intended at the time of grant (or upon a modification pursuant to applicable transition relief) to be subject to and compliant with ? 409A, rather than fit within the exception for stock rights.

Such relief is allowable for stock rights if, at the time of grant (or as modified), the recipient has the right to exercise such stock right only upon one or more of the following: (1) a fixed date or a period beginning and ending within one taxable year; or (2) a permissible payment event under § 409A and Treasury Regulation § 1.409A-3(a) (including any period following a payment event permitted under Treasury Regulation § 1.409A-3(b)).

Payments at Separation from Service

Notice 2010-80 provides an additional method of correction for certain failures involving payments at separation from service subject to the completion of employment-related actions by the service provider, such as a requirement to submit a release of claims or similar document. Under Notice 2010-6, correction was permissible only before a "payment event" and required that the plan be amended to provide for payment on the last day of any payment window. Notice 2010-80 permits correction through an amendment that, to the extent a payment crosses taxable years, the payment will be made in the second taxable year. Notice 2010-80 also provides transition relief, through 2012, with respect to such failures that were in effect on or before December 31, 2010. Several new examples explain this correction method and the transition relief.

Information Reporting

Under Notices 2008-113 and 2010-6, service recipients generally are required to (1) provide information regarding plan document corrections to service providers, and (2) attach such information to their own tax return. Service providers generally are required to attach to their own tax returns the information they receive from service recipients.

Notice 2010-80 provides some relief from these requirements. Under the new guidance, a service recipient is not required to provide the information statements described to affected service providers with respect to a plan that is eligible for, and corrected under, Notice 2010-6 section VI. B.3 (applicable to a plan provision that provides for payment upon a permissible payment event but conditions the payment on an employment-related action of the service provider, such as the execution and submission of a noncompetition agreement or a release of claims) or section XI (providing transition relief related to certain document failures, impermissibly linked plans, and payment schedules determined by the timing of payments received by the service recipient). That same exception also applies to the service provider's reporting requirements.

Notice 2010-80 also provides relief from the requirement under Notice 2008-113 that service recipients provide service providers with information with respect to corrections made in the same taxable year as the failure occurs.

Effective Date

Taxpayers may rely on Notice 2010-80 for the modifications to Notice 2008-113 for taxable years beginning on or after January 1, 2010; and may rely for the modifications to Notice 2010-6 for taxable years beginning on or after January 1, 2009.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.

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