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If I amend my plan to correct it, will my amended plan still be subject to penalties due to plan aggregation?


ERISA-Bubs

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We have a plan that we discovered is in violation of Code Section 409A. We would like to correct it so that it is in compliance with Code Section 409A going forward.

If we do this, will amounts deferred under the plan in future years still be at risk for the 20% penalty since amounts deferred in prior years were deferred in violation of Code Section 409A? Even if we started a new, compliant plan, wouldn't amounts deferred under the new, compliant plan be subject to the 20% penalty since the new plan would be aggregated with the old non-compliant plan?

In this situation, do we just have to scrap the idea of having a nonqualified plan altogether?

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Depending on the error, you may be able to take advantage of the corrections procedure under Notice 2010-06 that may limit some of the additional tax consequences.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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Thank you @XTitan. Unfortunately, this was an operational error. I could use Notice 2008-113 for the last 2 or 3 years, but the violation has been ongoing for some time now, so there would still be years that are uncorrectable under 409A.

Do you think the violation pre-2016 will continue to subject future deferrals under the plan to the 20% penalty even though the plan operation has been corrected?

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I'm confused. If you have an operational error, why do you need to amend the plan? Is the plan in currently in documentary compliance? I assumed that the reason for the plan amendment was failure for the plan to comply with 409A and thus the reference to Notice 2010-06.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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I'm confused. If you have an operational error, why do you need to amend the plan? Is the plan in currently in documentary compliance? I assumed that the reason for the plan amendment was failure for the plan to comply with 409A and thus the reference to Notice 2010-06.

That is a perfectly rational assumption. I withheld information purposely to keep the question simple, but I think I just succeeded in causing confusion. It's an impermissible linked plan issue. Notice 2010-06 only helps with linked plan issues during the transitional period, which ended 12/31/2011, so that doesn't help. The only alternative, is to interpret that plan as compliant (I believe the plan is vague enough to do this) and treat the impermissible linking as an operational error. Since the plan is vague, we're also going to amend it to make it very clear how the NQ and Qual plans are linked.

Regarding my initial question, I've come to the conclusion that we're safe going forward as long as the plan is in compliance going forward. Code Section 409A provides that when there is a violation:

"all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income."

So it appears everything that has been deferred so far is at risk, but past violations shouldn't affect future deferrals (only compensation deferred in preceding years).

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