Feds Unveil Potential 409A Compliance Relief

Federal officials on Monday issued additional guidance on how section 409A nonqualified deferred compensation programs can fix certain types of plan problems.

The Treasury Department and the Internal Revenue Service (IRS) stated in Notice 2007-100, for example, that if a plan violates 409A(a) but later corrects the problem, according to IRS rules, the issue will not result in a taxable event.

“If an unintentional operational failure to comply with 409A(a) occurs, but the operational failure is corrected in accordance with this § II, no amount is required to be included in income under § 409A(a) as a result of the failure,” the IRS guidance indicated. “The relief provided by this § II applies only to unintentional operational failures, which means an unintentional failure to comply with plan provisions that satisfy the requirements of § 409A(a) and the guidance thereunder, or an unintentional failure to follow the requirements of § 409A(a) in practice, due to one or more inadvertent errors in the operation of the plan.”

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The guidance makes it clear that the relief the document describes is strictly aimed at dealing with honest mistakes by plans – not specific and intentional acts.

“Relief is not available under this § II with respect to any intentional failure to comply with the terms of a plan or the requirements of § 409A in the operation of a plan,” the officials wrote. “The relief provided in this section also is not available with respect to an operational failure that is egregious, or where the failure is directly or indirectly related to participation in an abusive tax avoidance transaction (meaning any listed transaction under § 1.6011-4(b)(2)).’

In general, the guidance provides:

  • Methods for correcting certain operational failures during the taxable year of the service provider in which the failure occurs to avoid income inclusion under§ 409A(a), and
  • Transition relief limiting the amount includible in income under § 409A(a) for certain operational failures occurring in a service provider’s taxable year beginning before January 1, 2010, that involve only limited amounts.

Finally, the federal officials issued a call for public comment on a potential corrections program, including:

  • potential methods of tracking the “investment in the contract’ created when an amount is included in income under § 409A but not yet paid to the service provider, and
  • potential methods of addressing the service recipient’s deduction for payments made, and the effect of repayments by the service provider to the service recipient on such deductions.

Comments must be submitted by March 3, 2008 to Internal Revenue Service, CC:PA:LPD:RU (Notice 2007-100), Room 5203, PO Box 7604 , Ben Franklin Station, Washington, DC 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier’s Desk at 1111 Constitution Avenue, NW ,Washington, DC 20224, Attn:CC:PA:LPD:RU (Notice 2007-100), Room 5203.

Comments may also be sent via email to Notice.comments@irscounsel.treas.gov .

The latest NQDC guidance is available here.

NTSAA Calls for Help in Developing 403(b) Data Standards

The National Tax Sheltered Accounts Association (NTSAA) is establishing a working group to devise data standards that will enable information about 403(b) plan transactions to be provided to plan sponsors and administrators, as necessitated by recent IRS regulations.

Teresa Ward, Vice President of OppenheimerFunds Distributor, Inc. (an NTSAA Industry Partner), and Chuck Yanikoski, President of Still River Retirement Planning Software, Inc., will co-chair the project, according to the announcement.

“There is clearly a need for it, because the new regulations require plan sponsors or their designates to collect transaction information from every product provider, to assure compliance. This will be a very difficult task, subject to high error rates, if a uniform method is not created,” said Renée Wilder, Executive Director of NTSAA, in the announcement.

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Wilder explained there will be both a working group, to devise the standards, and a review group. She said NTSAA would like representatives from different kinds of firms to volunteer so all major segments of the industry are represented.

Yanikoski said the goal is to deliver standards by the end of March 2008. He said they hope product providers, broker/dealers, third-party administrators, marketing organizations and plan sponsors will adapt to the standards, although they will not be enforceable in any tangible way.

“We do expect that organizations failing to adopt them will have a much harder time of it when the new regulations go into effect, a little over a year from now,” Yanikoski said, in the announcement. New 403(b) regulations are generally effective with the 2009 plan year (See Final 403(b) Regulations Released).

Individuals who would like to participate in the project or would like to be kept apprised of its progress should contact Chuck Yanikoski, by phone at 978-456-7971 or by email at csy@StillRiverRetire.com.

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