On January 5, 2010, the Internal Revenue Service (the “IRS”) issued Notice 2010-6 (the “Notice”), which provides a voluntary correction program for “document failures” under deferred compensation plans. Participation in the program can either reduce or avoid the harsh tax results under Code §409A that apply to noncompliant deferred compensation programs.

Code §409A, enacted as part of the American Jobs Recovery Act of 2004 and generally effective as of January 1, 2009, substantially changed the tax rules applicable to deferred compensation programs. Failure to comply with the document and operational requirements of §409A can result in adverse tax consequences for the affected participant, including an early recognition of the compensation, plus a 20% penalty tax and interest on the underreported amount. Code §409A has broad reach because the definition of a deferred compensation plan applies to a wide array of compensation practices, including severance arrangements, bonus programs and change-in-control agreements.

The Notice provides employers the opportunity to correct certain document failures, which are erroneous written terms of the deferred compensation program. Specifically, the Notice clarifies how Code §409A applies to certain ambiguous plan terms, provides a correction procedure for erroneous provisions relating to payment events and initial deferrals, and details the information and reporting requirements for full correction. Full correction in accordance with the Notice will mitigate the adverse tax consequences, noted above, of the document failure.

In general, if certain events occur within a 1 year period following the correction, the affected participant may still be liable for the tax, albeit at a reduced rate. However, if the document failure is fully corrected before December 31, 2010 (or December 31, 2011 in limited instances), the affected participant will not be liable for the reduced tax.

This Notice supplements the previously issued Notice 2008-113, which provides a correction program for operational defects, such as an erroneous payment.

Given the opportunity to avoid accelerated taxes for the affected participant, as well as the IRS' stated intent to increase audit activity in this area, employers should review any and all agreements that could be considered deferred compensation under Code §409A. If any document failures are uncovered the employer should make any and all corrections before December 31, 2010.

If you have any questions regarding the above or need assistance with the review and correction of any deferred compensation arrangements, please feel free to contact Liza Hecht at lhecht@nfclegal.com or the Nukk-Freeman & Cerra attorney with whom you normally work.

Any tax advice included in this written or electronic communication was not intended or written to be used and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.