How to report / handle a violation.

Employee made elective contributions in 2018 and 2019.

He should have been paid in 2021, but was not -- it is too old to correct under the correction procedures (Notice 2008-113).

So we definitely have an uncorrectable error.  The employer is not interested in ignoring it and hoping it never gets discovered -- they want to fix it now.  I know we have to report it as a 409A violation and there will be a 20% excise tax.  But do we have to go back and report these as if the contributions were actually paid in 2018 and 2019?  Can we even go back that far?  To make matters worse, the participant also has older contributions (going all the way back to 2001) -- how do we handle those?

Can we just pay out everything now (2025), report it as a 409A payment, and pay the 20%?  Do we have to go back and report the contributions as paid in the year the contributions were made?

A follow up question:  Say Employee deferred $100,000 in 2018.  Due to earnings, that $100,000 is now worth $150,000.  How do we deal with the extra $50k?  Is it also reported as paid back in 2018 with penalty?  Is the $100k reported as paid in 2018 and the earnings ($50k) reported as paid now?  Do we need to calculate the earnings for every year from 2018 to today and report/correct for each year accordingly?

From my experience, there was a  lot of discussion of creating a correction program akin to EPCRS, to deal with 409A violations. That appears to have fallen by the wayside. Unless there is pressure to rekindle the idea, I think it is likely to go nowhere for the foreseeable future. What complicates this further is that the prospect of top execs facing significant tax exposure does not necessarily tear at the heart strings of many of the key policymakers in Washington.

Recognize that the employee or service provider might have interests and preferences that might not be wholly aligned with those of the employer or service recipient.

Each should want separate counsel.

Also, one might wonder about how “executive” a select-group participant is if she neglects to collect on her contract right to a six-figure amount.

This is not advice to anyone.

I recognize that there are other considerations here.  The IRS stance on 409A corrections is too rigid, and the executive should have collected.  But does anyone have any guidance regarding how to report this according to current IRS guidance?

I'm particularly interested in how to correct far-back errors.  Say the account was in violation of 409A as of 2015 when it had $100k in it.  For simplicity, lets say there were no earnings or additional contributions since then.  Do I really go back and correct 2015 taxes (as if it were paid in 2015)?  Can I even correct 10-year-old tax forms if I want to?

Notice 2008-113 as modified by Notice 2010-6 contains some limited relief and guidance.

I'm not sure God could figure out the interest component to the 409A penalty. It's in addition to the 409A 20%, and the basic idea is to calculate the IRS penalty interest from the date when the amount was first vested. For a salary deferral, that is measured from the date of the deferral, not the date when the payment should have been made.

The IRS owns most of this deferred payment after these penalties because they will have to be paid with after-tax dollars. Adding to the pain, most likely the agreement says the innocent (presumably innocent) employee is responsible for the penalties. When representing officers, I try to negotiate out of that clause whenever possible, and question its enforceability if the employee's role was passive.

Bottom line: there is no formal fix for an employer who wants to do this correctly. That should be the starting point for any legal advice. I doubt any lawyer who cares about his license would go further on a public message board.