IRS Notice 2008-113 (the "Notice") permits employers to correct certain operational errors for purposes of Section 409A of the Internal Revenue Code ("Section 409A"). The Notice provides transition relief that allows certain errors that occurred between 2005 through 2007 to be corrected in 2009 as if they were corrected in the tax year following the occurrence of the errors. Employers only have until the end of 2009 to take advantage of this relief with respect to 2005 through 2007 tax years.
Section 409A is designed to place restrictions on nonqualified deferred compensation arrangements and subject noncompliant arrangements to a 20% additional.
Section 409A tax (with an additional 20% tax in California). Section 409A's reach potentially extends far beyond traditional deferred compensation arrangements into employment agreements, bonus provisions and even certain stock rights. The complexity and confusion of Section 409A has created inadvertent and unintentional operational errors under Section 409A. The Notice permits certain of these errors to be corrected through a correction procedure.
The type of errors that can be corrected under the Notice include:
The Notice designates three categories for corrections based on how quickly the error is corrected:
Generally, there are no corrections procedures for errors beyond the second tax year following the error.
The Notice also provides transition relief for errors that occurred in 2005 through 2007, and if such errors are corrected in 2009, they will be treated in the second category, i.e., as if they were corrected in the next tax year after the errors occurred. This transition relief does not apply to insiders.
The IRS has recently begun Section 409A audits, focusing primarily on tax years 2006 through 2008. Because companies have only until the end of the year to take advantage of the transition correction procedure set forth in the preceding paragraph, we encourage employers to review their deferred compensation arrangements and take actions to correct, before the end of the year, any errors that are discovered.
For more information, we encourage employers to contact any attorney in the Executive Compensation and Employee Benefits Group.
Scott P. Spector (650.335.7251–email@example.com)
Blake W. Martell (650.335.7606–firstname.lastname@example.org)
John E. Ludlum (650.335.7872–email@example.com)
Liza Wells Morgan (650.335.7230–firstname.lastname@example.org)
Gerald Audant (415.875.2362–email@example.com)
Nicholas F. Frey (650.335.7882–firstname.lastname@example.org)
©2009 Fenwick & West LLP. All Rights Reserved.
The views expressed in this publication are solely those of the author, and do not necessarily reflect the views of Fenwick & West LLP or its clients. The content of the publication ("content") is not offered as legal or any other advice on any particular matter. The publication of any content is not intended to create and does not constitute an attorney-client relationship between you and Fenwick & West LLP. You should not act or refrain from acting on the basis of any content included in the publication without seeking the appropriate legal or professional advice on the particular facts and circumstances at issue.
IRS Circular 230 Disclosure: to ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice in this communication (including attachments) is not intended or written by Fenwick & West LLP to be used, and cannot be used, for the purpose of (i) avoiding penalties under the internal revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.