That's a lot of words, and you might have to be a cryptographer to figure out what it all means, but trust me, this is good news -- very good news. The regulators in Washington have read comments, and while other remarks -- both verbal and in writing -- have gotten no official observance from the regulators, this writer thinks that those remarks have been noticed as well.
So, what's the buzz, tell me what's a happening (apologies to Andrew Lloyd Webber for reusing his Jesus Christ Superstar lyrics in a slightly different context).
Here is a summary of the news:
- Documentary failures under linked nonqualified plans (NQ linked to other NQ and or NQ linked to qualified) are now eligible for relief under Notice 2010-6, so long as the linkage does not affect the timing or form of payments under the plans. For many companies, on a scale of 10, this relief qualifies as an 11.
- Documentary failures for certain stock rights are now eligible for Notice 2010- relief.
- An additional method of correction is now available for certain separation payments that are subject to a release of claims, and this method is very workable.
- There is relief from the extremely onerous service provider (employee) reporting requirements for the Notice 2010-6 transition relief for "freebie" correction under Notice 2010-6.
- There is relief for service recipients (employers) with respect to the information that they need to provide to service providers (employees) for Notice 2008-113 corrections made during the same taxable year.
The fourth and fifth (last two bullets) may look like small potatoes, but I am aware of multiple Fortune 500 companies that chose to have 409A failures rather than go through the 2008-113 or 2010-6 correction processes because of the requirements to provide information. So, these small potatoes are actually bigger than the eye perceives.
On to the nitty-gritty ...
The Linked Plans Issue
In my experience, this was the worst provision of the 409A regulations. No practitioners that I work with saw this seemingly innocent failure coming. Let's consider two fairly simple and common types of failures.
Example 1. Company A provides Executive E with a qualified defined benefit plan under which E is entitled to an annual benefit not to exceed the 415 limit of 1% of 5-year final average pay (not in excess of the pay cap) per year of service. A also provides E with an 'excess' plan (nonqualified) under which E receives an annual benefit under the same formula, but without regard to the 415 limit and pay cap, and further offset by the qualified plan benefit.
Pause for a slap on the wrist.
Now, suppose that E has elected a lump sum payment upon separation from service from the nonqualified plan, but that the amount of this lump sum could be affected by the timing and form of the qualified plan payment. This appears to violate the 409A regulations, and there was no fix available under Notice 2010-6. Notice 2010-80 allows for correction under Notice 2010-6.
Example 2. The facts are the same as in Example 1, except that E does not have a lump sum option in the excess plan, but E also participates in a top-hat plan (SERP) with a richer benefit formula (offset by all other defined benefits) that does have a lump sum option. E has made a bona fide initial deferral election in the excess plan to take a 50% Joint and Survivor Annuity (with his wife as beneficiary) and a lump sum on the last day of his tax year following or coincident with separation from service from the SERP.
Here we appear to have two violations of the 409A regulations, so pause for 40 lashes.
Again, Notice 2010-6 would not have allowed for correction of this 'defect', but Notice 2010-80 amends Notice 2010-6 to allow for such documentary corrections.
Separation Payments Contingent on Employment-Related Actions
This is another biggie. Again, Notice 2010-6 is amended by allowing for additional methods of correction. Suppose the service provider (again, this is usually the employee) needs to complete certain action(s) such as executing and submitting a non-compete in order to receive his separation payments. Paying the benefit upon separation from service eliminates the teeth in the non-compete; that is, the service provider could take his payment and decide to not sign the non-compete. Delaying payment violates 409A.
But now, the fix is in, and it's a good one. The document can be amended to allow for payment [in general terms] either 60 or 90 days following the separation (permissible payment event) so long as in the event that the 90-day period spans two taxable years, the payment will be made during the second of those taxable years.
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There's more -- of course there is -- much more in the Notice, but this should give you an overview of what I think readers may need to know. This stuff is pretty complex though, especially on the defined benefit side, and if you are dealing with it and don't have the in-house expertise (most companies don't), I suggest that you engage someone who is expert in both defined benefit plans and nonqualified plans to help. But, I repeat, this is good news.
Don't wait. Act quickly. Get these things fixed.
The author is not an attorney or accountant and does not provide legal, accounting or tax advice.