A new client pops on me SERP docs that do not comply with IRC § 409A.
Does anyone know what the IRS' progress is on developing an EPCRS for IRC § 409A document failures is? How soon the IRS might be to launching such?
Any suggestions on how to handle the document failure in the meantime?
Full Version: Document Failure Relief?
QUOTE (J Simmons @ Feb 5 2009, 03:48 PM) 
A new client pops on me SERP docs that do not comply with IRC § 409A.
Does anyone know what the IRS' progress is on developing an EPCRS for IRC § 409A document failures is? How soon the IRS might be to launching such?
Any suggestions on how to handle the document failure in the meantime?
Does anyone know what the IRS' progress is on developing an EPCRS for IRC § 409A document failures is? How soon the IRS might be to launching such?
Any suggestions on how to handle the document failure in the meantime?
I have the same question and have not been able to find an answer. Any help would be much appreciated.
Here is a portion of text from a recent CCH article on the topic:
"A program for correcting plan document violations is “not necessarily the next step” the government will take as it develops a voluntary correction program for Code Sec. 409A violations, an IRS official told practitioners on January 27, 2009. The government is still trying to determine whether it is feasible to have a document correction program, Stephen Tackney, IRS senior counsel, Executive Compensation Branch, Associate Chief Counsel (Tax Exempt and Government Entities), indicated at a D.C. Bar Taxation Section program.
Tackney said one concern is that the government does not want to put people with document failures in a better position to make plan changes than people whose plans comply with Code Sec. 409A. The official asked for comments on a plan document correction program. One audience member suggested that a program would be particularly useful for new plans."
"A program for correcting plan document violations is “not necessarily the next step” the government will take as it develops a voluntary correction program for Code Sec. 409A violations, an IRS official told practitioners on January 27, 2009. The government is still trying to determine whether it is feasible to have a document correction program, Stephen Tackney, IRS senior counsel, Executive Compensation Branch, Associate Chief Counsel (Tax Exempt and Government Entities), indicated at a D.C. Bar Taxation Section program.
Tackney said one concern is that the government does not want to put people with document failures in a better position to make plan changes than people whose plans comply with Code Sec. 409A. The official asked for comments on a plan document correction program. One audience member suggested that a program would be particularly useful for new plans."
Anyone have any suggestions on how to deal with this situation in the meantime?
Should the employee self-report the 20% extra income tax? If so, which tax year would that be for?
Notice 2007-86, §3.01(B)(1) modified §3.01 of Notice 2006-79 to provide in part that (emphasis is mine)
From this, I understand the implication to be that if a plan is not amended on or before 12/31/08, then there could be a violation on or before 12/31/08.
As 409A took effect generally 1/1/05 (plan has not been substantially modified since 10/3/2004) and the document requirement merely postponed, would the violation for a plan that did not have the necessary plan amendments occur in 2008 or 2005? If 2005, the return has been filed, was filed in good faith, and did not disclose a 409A violation or 20% extra income tax. There are a couple of tax court cases that would suggest the taxpayer does not have to file an amended return where the original was filed under a good faith belief in its accuracy.
If 2008, the Instructions to Line 61 of 2008 Form 1040 list as numbered item #12 basically impose on the taxpayer an obligation of self-assessment (and that the employer would report on Forms W-2 or 1099-MISC) of
It would appear that any argument for 2005 would be fruitless given how IRC § 409A(a)(1)(A) reads: "If at any time during a taxable year a nonqualified deferred compensation plan fails to meet the requirements [of IRC § 409A] ... all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income." Granted the plan was in violation as of 1/1/2005, but the plan did not for 2008 meet the requirements of IRC § 409A and none of the compensation deferred in 2008 or earlier years was included in gross income previously, and so it would appear that the taxpayer should self-assess the entire amount of compensation deferred in 2008 and earlier years as additional taxable income for 2008, and label it NQDC.
Anyone else see it differently?
Should the employee self-report the 20% extra income tax? If so, which tax year would that be for?
Notice 2007-86, §3.01(B)(1) modified §3.01 of Notice 2006-79 to provide in part that (emphasis is mine)
QUOTE
A plan adopted on or before December 31, 2008 will not be treated as violating section 409A(a)(2), (3) or (4) on or before December 31, 2008 if the plan is operated through December 31, 2008 in compliance with the provisions of section 409A and applicable provisions of Notice 2005-1 and any other generally applicable guidance published with an effective date prior to January 1, 2008, and the plan is amended on or before December 31, 2008 to conform to the provisions of section 409A and the final regulations under section 409A (70 Fed. Reg. 19234 (April 17, 2007)) with respect to amounts subject to section 409A.
From this, I understand the implication to be that if a plan is not amended on or before 12/31/08, then there could be a violation on or before 12/31/08.
As 409A took effect generally 1/1/05 (plan has not been substantially modified since 10/3/2004) and the document requirement merely postponed, would the violation for a plan that did not have the necessary plan amendments occur in 2008 or 2005? If 2005, the return has been filed, was filed in good faith, and did not disclose a 409A violation or 20% extra income tax. There are a couple of tax court cases that would suggest the taxpayer does not have to file an amended return where the original was filed under a good faith belief in its accuracy.
If 2008, the Instructions to Line 61 of 2008 Form 1040 list as numbered item #12 basically impose on the taxpayer an obligation of self-assessment (and that the employer would report on Forms W-2 or 1099-MISC) of
QUOTE
12. Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements. This income should be shown in box 12 of Form W-2 with code Z, or in box 15b of Form 1099-MISC. The tax is 20% of the amount required to be included in income plus an interest amount determined under section 409(a)(1)(B)(ii). See section 409A(a)(1)(B) for details. Identify as "NQDC."
It would appear that any argument for 2005 would be fruitless given how IRC § 409A(a)(1)(A) reads: "If at any time during a taxable year a nonqualified deferred compensation plan fails to meet the requirements [of IRC § 409A] ... all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income." Granted the plan was in violation as of 1/1/2005, but the plan did not for 2008 meet the requirements of IRC § 409A and none of the compensation deferred in 2008 or earlier years was included in gross income previously, and so it would appear that the taxpayer should self-assess the entire amount of compensation deferred in 2008 and earlier years as additional taxable income for 2008, and label it NQDC.
Anyone else see it differently?
Today I received a call back from the voicemail message I left for Stephen Tackney at the IRS Nat'l Office. The message asked for what, if any, informal resolution the IRS might be offering for 409A document failure, pending possible issuance someday of a formal resolution program for 409A document failure.
When I mentioned that before ineligible employer failure for 403b plans was added to EPCRS, Bob Architect offered a less formal absolution process, the attorney that called back from Tackney's office seemed somewhat surprised, explaining he'd not heard of that type of relief.
He did mention that no resolution short of 409A extra 20% taxation is one possibility under consideration by the Nat'l Office for 409A document failures, but that no decision had yet been made.
He did indicate that they would welcome any thoughtful comments, including those that proposed the details for a 409A document failure resolution process. Comments may be sent to them a Notice.comments@irscounsel.treas.gov.
When I mentioned that before ineligible employer failure for 403b plans was added to EPCRS, Bob Architect offered a less formal absolution process, the attorney that called back from Tackney's office seemed somewhat surprised, explaining he'd not heard of that type of relief.
He did mention that no resolution short of 409A extra 20% taxation is one possibility under consideration by the Nat'l Office for 409A document failures, but that no decision had yet been made.
He did indicate that they would welcome any thoughtful comments, including those that proposed the details for a 409A document failure resolution process. Comments may be sent to them a Notice.comments@irscounsel.treas.gov.
(good morning; new to this blog) On a related topic, I am trying to amend a document that _does_ comply with 409A, but the client wants to add deferral options that are not in the doc (although the doc permits adding deferral options). I am thinking that I _can_ add deferral options without fouling up the plan, but that if a participant wants to select that new option, then the 12-month, 5-year requirement comes into play. Does that make sense? Thanks.
Don't know if the Honorable Lord Tackney or his minions mentioned this, but at least some types of documentary slip-ups can apparently be corrected before the deferred amounts become vested for 409A purposes. The primary application of this I've seen so far has been in the case of severance arrangements and employment agreements for key employees where the required delay language was not in the arrangement by 12/31/08. Tackney has said on several recent occasions that this situation would essentially cause a consequence-free 409A violation given how the proposed income inclusion regs apply to severance arrangements (i.e., there is a 409A violation, but no income inclusion or additional tax). This is obviously not a general purpose get-out-of-jail-free card, but it's better than a poke in the eye. Also, Tackney has indicated (informally, of course) that a pattern and practice of making changes to deferral arrangements prior to the year of vesting might be disregarded as abusive. Note that Lord Tackney's army of enforcers is pretty small and unsophisticated at this point, and this reality may temper his more unsettling pronouncements.
One other thing to bear in mind is the general lack of desire to offer much in the way of documentary relief on the part of some folks in the Chief Counsel's office. I have raised this directly with Tackney and others (not Bill Schmidt, who is a somewhat more practical-minded fellow than Tackney) and gotten the back of the hand. Analogies to EPCRS don't cut it because, as they'll tell you, Congress wants to keep qualified plans qualified but doesn't really care all that much about whether executives get hit with additional taxes. I am not sure how they might deal with the documentary compliance issue given the generalized suspicion (and not without some basis) that all of the practitioners are just looking for a way to screw Uncle Sam out of some 409A revenue with a bunch of hair-splitting interpretive gymnastics. From what I've heard to date, I wouldn't count on a lot of leniency here.
One other thing to bear in mind is the general lack of desire to offer much in the way of documentary relief on the part of some folks in the Chief Counsel's office. I have raised this directly with Tackney and others (not Bill Schmidt, who is a somewhat more practical-minded fellow than Tackney) and gotten the back of the hand. Analogies to EPCRS don't cut it because, as they'll tell you, Congress wants to keep qualified plans qualified but doesn't really care all that much about whether executives get hit with additional taxes. I am not sure how they might deal with the documentary compliance issue given the generalized suspicion (and not without some basis) that all of the practitioners are just looking for a way to screw Uncle Sam out of some 409A revenue with a bunch of hair-splitting interpretive gymnastics. From what I've heard to date, I wouldn't count on a lot of leniency here.
My firm has earned some nice fees working with 409A over the past 4+ years. Nevertheless, I predict a substantial contraction of 409A, if not an outright repeal, because the prospect of the IRS assessing draconian taxes for document violations attributable to ignorance is just too ridiculous. This is to be distinguished from qualified plans, where the employer is getting an accelerated tax deduction and has an incentive to comply.
Good point re: correction in year with no income to report.
Here's my puzzle: presently the plan pays in installments. I think I could add an additional deferral option of a lump sum w/o a 409A violation, so long as I also say electing that would mean I wait 5 years after the installments would have started to get my lump sum (12 months in advance ,etc.).
If, though, I _change_ the plan and say, as a default, that the payment is in a lump sum (and offer the installments as a deferral election), then I think I will have written in a change in time/form without intending to wait 5 years before its effect. However, this is a year where all of the amount is still s/t a substantial risk, so it looks like my penalty is 20% of nothing. And in subsequent years, I no longer have a problem. And I will only do this once; promise. Does that sound like it fits into the operational correction guidance?
Here's my puzzle: presently the plan pays in installments. I think I could add an additional deferral option of a lump sum w/o a 409A violation, so long as I also say electing that would mean I wait 5 years after the installments would have started to get my lump sum (12 months in advance ,etc.).
If, though, I _change_ the plan and say, as a default, that the payment is in a lump sum (and offer the installments as a deferral election), then I think I will have written in a change in time/form without intending to wait 5 years before its effect. However, this is a year where all of the amount is still s/t a substantial risk, so it looks like my penalty is 20% of nothing. And in subsequent years, I no longer have a problem. And I will only do this once; promise. Does that sound like it fits into the operational correction guidance?
QUOTE (PatriciaT @ Mar 3 2009, 10:29 AM)
Good point re: correction in year with no income to report.If, though, I _change_ the plan and say, as a default, that the payment is in a lump sum (and offer the installments as a deferral election), then I think I will have written in a change in time/form without intending to wait 5 years before its effect. However, this is a year where all of the amount is still s/t a substantial risk, so it looks like my penalty is 20% of nothing. And in subsequent years, I no longer have a problem. And I will only do this once; promise. Does that sound like it fits into the operational correction guidance?
I agree in part, but you won't like my take on this. I do agree that there is no taxable violation in the amendment year, when you change one non-vested form to another non-vested form.
However, who says there can be only one violation? Doesn't a violation occur in the year when the first payment would have occurred? Isn't that the year when you violated the timing rules that were in place before the service years?
Remember, you cannot change the timing rules after the service years have started unless you use the 1/5 year postponement device or the limited acceleration exceptions. Lack of vesting at the time of the amendment is a red herring.
George
I agree with George. If you have an accelerated payment (or delayed payment) in a future year as a result of the change...you have a violation in that future year. Think of the potential abuse if it were otherwise.
OK, so if I run across a document which fails 409A because the payment option is not specific (lump sum or installments over not more than 8 years). Can this be cured? If some amounts are granted in 2008 and are 20% vested, but not paid until termination of employment or death, perhaps we have 20% of the 2008 grant subject to taxation in 2009.
Can we redefine the payment terms? Can we terminate the plan? Can we confine the damage?
Can we redefine the payment terms? Can we terminate the plan? Can we confine the damage?
QUOTE (erisafried @ Mar 3 2009, 07:39 AM)
Don't know if the Honorable Lord Tackney or his minions mentioned this, but at least some types of documentary slip-ups can apparently be corrected before the deferred amounts become vested for 409A purposes. The primary application of this I've seen so far has been in the case of severance arrangements and employment agreements for key employees where the required delay language was not in the arrangement by 12/31/08. Tackney has said on several recent occasions that this situation would essentially cause a consequence-free 409A violation given how the proposed income inclusion regs apply to severance arrangements (i.e., there is a 409A violation, but no income inclusion or additional tax). This is obviously not a general purpose get-out-of-jail-free card, but it's better than a poke in the eye. Also, Tackney has indicated (informally, of course) that a pattern and practice of making changes to deferral arrangements prior to the year of vesting might be disregarded as abusive. Note that Lord Tackney's army of enforcers is pretty small and unsophisticated at this point, and this reality may temper his more unsettling pronouncements.
One other thing to bear in mind is the general lack of desire to offer much in the way of documentary relief on the part of some folks in the Chief Counsel's office. I have raised this directly with Tackney and others (not Bill Schmidt, who is a somewhat more practical-minded fellow than Tackney) and gotten the back of the hand. Analogies to EPCRS don't cut it because, as they'll tell you, Congress wants to keep qualified plans qualified but doesn't really care all that much about whether executives get hit with additional taxes. I am not sure how they might deal with the documentary compliance issue given the generalized suspicion (and not without some basis) that all of the practitioners are just looking for a way to screw Uncle Sam out of some 409A revenue with a bunch of hair-splitting interpretive gymnastics. From what I've heard to date, I wouldn't count on a lot of leniency here.
One other thing to bear in mind is the general lack of desire to offer much in the way of documentary relief on the part of some folks in the Chief Counsel's office. I have raised this directly with Tackney and others (not Bill Schmidt, who is a somewhat more practical-minded fellow than Tackney) and gotten the back of the hand. Analogies to EPCRS don't cut it because, as they'll tell you, Congress wants to keep qualified plans qualified but doesn't really care all that much about whether executives get hit with additional taxes. I am not sure how they might deal with the documentary compliance issue given the generalized suspicion (and not without some basis) that all of the practitioners are just looking for a way to screw Uncle Sam out of some 409A revenue with a bunch of hair-splitting interpretive gymnastics. From what I've heard to date, I wouldn't count on a lot of leniency here.
Does anyone have any additional word on a plan document failure correction program?
It appears that the IRS has issued some limited relief for document correction of plans that do not comply with 409A.
I can hardly believe it.
http://op.bna.com/dt.nsf/id/csaz-7zeqe3/&#...ile/n-10-06.pdf
I can hardly believe it.
http://op.bna.com/dt.nsf/id/csaz-7zeqe3/&#...ile/n-10-06.pdf
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