Are Your Executive Compensation Agreements Up to Date?
IRS Introduces Section 409A Correction Program
Very few compliance violations impose tax penalties as severe as those that apply under Section 409A of the Internal Revenue Code ("Section 409A") to individuals who are covered under nonqualified deferred compensation agreements. If executives and others in your organization are covered under a top-hat plan, a supplemental retirement plan, an employment agreement or another form of nonqualified deferred compensation agreement, there is a limited opportunity to amend those agreements to avoid accelerated federal income tax liability, premium interest on late tax payments and a 20 percent penalty. The most favorable treatment applies to agreements that are corrected by December 31, 2010.
Because the rules are so complex and extensive, a nonqualified deferred compensation agreement that has not been revised specifically to address Section 409A is highly likely to be out of compliance with the Section 409A requirements. Sanctions will apply to the individuals covered by the agreement even if they have not received a distribution. Many small and mid-sized employers have not addressed the need to comply with Section 409A despite the fact that harsh penalties will affect their top executives. Some agreements have been amended to meet the 409A requirements, but may not have been drafted as precisely as necessary. In an effort to bring all agreements into compliance, the Internal Revenue Service has a program that allows affected agreements to be amended with dramatically reduced penalties (and in many cases, no penalties) if action is taken by December 31, 2010. The program is set forth in Notice 2010-6 (the "Notice").