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.”
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.firstname.lastname@example.org .
The latest NQDC guidance is available here.