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Section 409A Correction Program

Sec. 409A imposes restrictions on the operation of nonqualified deferred compensation plans. The IRS has established a correction program for certain violations of the Sec. 409A rules.

December 2008
by G. Edgar Adkins Jr., et al./The Tax Adviser

Sec. 409A imposes restrictions on the operation of nonqualified deferred compensation plans. Sec. 409A and the corresponding regulations are extremely complex. The definition of deferred compensation is very broad, causing Sec. 409A to apply to a wide variety of compensation arrangements extending well beyond traditional deferred compensation plans and including arrangements with rank-and-file employees as well as executives.

Compliance with Sec. 409A requires a great deal of attention to detail. It is unlikely that an arrangement can comply with Sec. 409A without the establishment of, and perfect adherence to, flawless administrative procedures. Despite the detailed regulations and other guidance that the IRS has issued, new questions continually arise as to the proper application of Sec. 409A to various types of nonqualified deferred compensation arrangements. Given the complexity of Sec. 409A, it seems inevitable that taxpayers will make mistakes as they attempt to comply with it. Fortunately, the IRS has established a correction program for certain violations of the Sec. 409A rules.

This program, which is set forth in Notice 2007-100, provides for the self-correction of certain unintentional operational errors without any penalties if the errors are corrected within the same tax year of the service provider in which the errors occur. (The term “service provider” refers to individuals who are providing services, such as employees, independent contractors, or board members.

This article has been excerpted from The Tax Adviser. View the full article here (PDF).

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