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409A Transition Relief for Correction of Document ... (Nov 2010)

Instant Insights (Nov. 4, 2010)

409A Transition Relief for Correction of Document Failures Expires Dec. 31, 2010
In January of this year, the IRS issued Notice 2010-06, which provided a mechanism for employers to correct certain plan document failures in their nonqualified deferred compensation plans and other employment, change in control or severance agreements that are subject to the regulations under Section 409A. The notice provides a transition period that would allow for the correction of certain technical document problems without adverse tax consequences, if made prior to the end of 2010.

Generally, the major areas of the guidance provide for the correction of ambiguous language and defective distribution provisions in plan documents, including:

• Ambiguous payment provisions (such as “as soon as administratively practicable”)
• Impermissible definition of otherwise permissible payment events; specifically separation from service, change in control event and disability
• Impermissible payment periods following a permissible payment period
• Certain impermissible payment events and payment schedules which, among several items, includes impermissible discretion by the employer or the employee related to subsequent deferral elections
• Impermissible provisions linking nonqualified plans with respect to the time and form of payment (transition period for this defect extends to Dec. 31, 2011)
• Failure to include a six-month delay of payment for specified employees (for publicly traded companies)

These corrections may still require inclusion of income, but under certain criteria the amount of the income that must be included may be reduced to 25% or 50% of the affected account balance. Note also, that certain payments made prior to the document being amended might also create an operational error that must be corrected in accordance with Notice 2008-113.

Plans sponsors are encouraged to review their plans that are subject to Section 409A with counsel to ensure that their plan document language is compliant, and take any necessary corrective action prior to the end of the year. Certain document failures that are corrected via this relief require that the employer attach a statement to its federal tax return, providing the name(s) and taxpayer identification number(s) of the affected individuals, and other pertinent information. A similar statement must also be provided to affected individuals to be attached to their tax returns.

IRS Circular 230 Disclosure: This communication was written in connection with the potential promotion or marketing, to the extent permitted by applicable law, of the transaction(s) or matter(s) addressed herein by persons unaffiliated with JPMorgan Chase & Co. However, JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, to the extent this communication contains any discussion of tax matters, such communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties. Any recipient of this communication should seek advice from an independent tax advisor based on the recipient's particular circumstances.