Jim Gehring Published in The Practical Law Journal
“End of Year Deadline for Section 409A Corrections”

Jim Gehring’s article, “End of Year Deadline for Section 409A Corrections,” was published in the December 2009/January 2010 issue of The Practical Law Journal. Although December 31, 2008 was the official deadline for bringing all deferred compensation plans and agreements into compliance with the new IRS regulations under Section 409A of the Internal Revenue Code, there are still several steps an employer can take by the end of 2009 to correct, or at least mitigate the effect of failures to comply with IRC Section 409A.

According to Jim’s article, failure to comply with the strict rules of IRC Section 409A can result in all of an employee’s deferred compensation—not just the amount involved in the error—being immediately subject to tax, plus 20% penalty tax and retroactive interest if the error is not corrected using the IRS guidelines. Jim notes that the IRS has a correction program that allows employers to correct “operational errors” that occur in the administration of a deferred compensation plan. He further notes that the IRS procedures contain detailed guidelines on the methods to be used for corrections, including specifying when interest must be paid on reimbursements and when corrections can be adjusted for investment earnings.

Jim concludes that any company that did not succeed in amending all of its severance plans and employment agreements to comply with IRC Section 409A by the end of 2008 (or that has discovered additional plans or agreements since then) has a second chance to correct them if the benefits have not vested by the end of 2009.