Now that the “good faith” compliance period under Code section 409A has ended, nonqualified plans must be operated in accordance with their terms and the final regulations under section 409A. If operational errors occur, they may result in draconian tax consequences under section 409A for affected executives, including a well-publicized 20% additional tax. And the IRS has stated that it intends to begin section 409A audits soon.
Last December, the IRS announced an expanded correction program for certain operational errors under Code section 409A. Correction of an error under this program can eliminate, or greatly reduce, the adverse tax consequences for affected executives. Importantly, the IRS program provides an expanded ability to correct errors in past years, but only during 2009.
The attached chart summarizes key features of the different correction mechanisms available under the IRS program and outlines generally applicable requirements. We would be pleased to assist you in analyzing section 409A compliance issues, including whether an operational error may be fixed under the IRS correction program or outside the program.
