On January 5, 2010, the Internal Revenue Service (IRS) issued Notice 2010-6 providing employers and employees with long-awaited guidance (and relief) with respect to correction of certain document failures that otherwise would subject nonqualified deferred compensation arrangements to the punitive terms of Section 409A of the Internal Revenue Code. Although the IRS previously issued guidance in December 2008 relating to voluntary correction of operational failures, the earlier guidance did not provide relief for document failures. The new Notice provides relief for certain document failures and clarifies earlier guidance dealing with operational failures by nonqualified deferred compensation arrangements and reporting and withholding guidelines under Section 409A.

Plan Document Failures Subject to Relief or Correction

Notice 2010-6 provides relief and the opportunity for correction of a number of possible plan document failures, including the following:

  • The Notice provides relief with respect to ambiguous phrases such as “as soon as reasonably practicable” that are either not defined or defined terms that are not compliant with Section 409A. These terms will not necessarily require amendment, as long as the deferred compensation arrangement is operated in a manner compliant with Section 409A; however, employers may still want to take the opportunity to amend the documents to eliminate any ambiguity.
  • The Notice permits amendment to correct impermissible definitions of otherwise permissible payment events which do not comply with Section 409A (e.g., incorrect definitions of “separation from service” or “change in control”).
  • Notice 2010-6 includes a specific rule allowing retroactive document correction relating to the definition of “disability,” provided that erroneous payments made pursuant to the erroneous definition are corrected as operational failures in accordance with the IRS’s earlier guidance (Notice 2008-113).
  • The Notice also provides relief with respect to document terms that condition payment on employment-related actions of the service provider, including terms requiring a release of claims or execution of non-competition or non-solicitation agreements.
  • The Notice allows for amendment to correct terms providing for impermissible payment schedules following an otherwise permissible payment event (e.g., payment based on one of Section 409A’s triggering events, but to be distributed on a schedule not meeting Section 409A’s requirements).
  • The Notice allows amendment to rectify omission of the six-month delay in payment upon separation from service for specified employees of publicly-owned companies.
  • Notice 2010-6 also clarifies Notice 2008-113 (relating to correction of operational failures) with respect to certain issues including: application of the subsequent year correction method to late payments of deferred amounts, the method for calculating additional amounts due to an employee in the event of a late payment made in property (rather than in cash), and the method for calculating amounts to be repaid by the employee to correct for early payment made in property.
  • Notice 2010-6 also modifies Notice 2008-115 (related to reporting and withholding guidelines under Section 409A) to conform the prior reporting and withholding guidance to the provisions of Notice 2010-6.

Benefits of Correction under Notice 2010-6

Under the new guidance, certain document failures may be corrected without inclusion of deferred amounts in current taxable income or the imposition of the additional taxes and interest imposed by Section 409A, as long as the corrected plan provision does not affect the operation of the plan within one year following the date of correction.

In the event that the corrected provision of the document affects the operation of the plan within one year following the date of correction, the new guidance limits both the amount currently includible in income and the additional taxes and interest imposed by Section 409A.

Notice 2010-6 also affords relief by allowing avoidance of inclusion in current income or the additional taxes imposed by Section 409A if the document is corrected within a limited period of time following adoption.

Self-Correction and Reduced Reporting Requirements

Notice 2010-6 generally allows employers to self-correct these document failures without filing with the IRS for approval of the correction (and incurring the related user fees) and with fewer reporting and disclosure requirements. In certain circumstances, however, both employers and employees may face additional reporting and disclosure requirements, including submission of a notice of correction under Notice 2010-6 with their respective federal tax returns.

Transitional/Retroactive Effect

An additional benefit of the correction relief offered under Notice 2010-6 is that corrections made may be made effective retroactively. Corrections made by December 31, 2010 may be treated as effective on January 1, 2009, as long as any operational failures caused by the document failure (specifically early or late payments of deferred amounts) are also corrected in accordance with Notice 2008-113 by December 31, 2010. This transitional relief increases the importance of acting quickly to review deferred compensation plans and bringing both the documents and operation of deferred compensation arrangements into compliance this year. This effectively provides an additional grace period ending December 31, 2010, to correct certain document defects without penalty.

Limits on Correction

Although Notice 2010-6 offers employers the chance to review their deferred compensation arrangements, identify noncompliant provisions, and amend the documents to comply with Section 409A, the relief is not all-inclusive. For example it does not provide complete relief where the corrected plan document affects the operation of the plan within one year following the date of correction. 

Furthermore, the relief afforded under Notice 2010-6 applies only to document failures that are both inadvertent and unintentional. In addition, relief under Notice 2010-6 is not available for employers or individuals whose returns are under examination with respect to nonqualified deferred compensation for any taxable year in which the plan document failure existed. Relief is also not available for failures that are directly or indirectly related to participation in any listed transaction under Treasury Regulation
§ 1.6011-4(b)(2). Finally, Notice 2010-6 does not provide relief for plans that are linked to other qualified or nonqualified deferred compensation plans or plans that provide stock rights.

Request for Additional Comments

In Notice 2010-6, the Treasury Department and the IRS also request comments regarding other common document failures methods used to correct them. Comments relating to these other document failures must be submitted by April 5, 2010.


In Notice 2010-06, the IRS affords employers the opportunity to review the documents governing their deferred compensation arrangements and correct certain deficiencies to avoid the draconian tax consequences Section 409A imposes in the event of a compliance failure.

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