February 12, 2010 / Law Alert

IRS Offers Ability to Amend Nonqualified Deferred Compensation Plans Without Penalty

The IRS recently gave employers a unique opportunity to correct tax compliance defects with many executive compensation programs. The IRS issued Notice 2010-6 (“the Notice”), which allows employers to fix limited errors involving Internal Revenue Code Section 409A by December 31, 2011. Most plan documents, however, need to be amended by December 31, 2010. Amending NQDC plans by this deadline could allow employees to avoid immediate taxation on amounts deferred and additional penalty taxes. Employers may amend plan documents after this deadline, but employees may have to include up to 50 percent of the amount deferred under the plan in income and pay an additional 20 percent penalty tax on such amount. This alert summarizes the key points of the corrections program.