On January 5, 2010, the IRS issued a document correction program (“Notice 2010–6” or “Document Correction Program”) for nonqualified deferred compensation (“NQDC”) plans subject to Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”). Previously, in Notice 2008–113 the IRS had provided correction procedures solely for unintentional operational errors under NQDC plans. Together these correction programs can help taxpayers avoid the draconian tax penalties for failures to comply with Section 409A. These penalties can consume almost all of an employee’s benefits under a NQDC plan. If there is a document or operational failure under Section 409A, the taxpayer must pay federal income taxes on the NQDC in the year of the failure plus an additional 20% tax penalty and a premium interest tax. Residents of California must pay a 20% tax penalty in addition to state income taxes. Because of these steep taxes and penalties, it is essential that any unintentional failure under Section 409A be immediately discovered and corrected under these programs, which permit taxpayers to eliminate or significantly reduce the required taxes and penalties. Key aspects of Notice 2010–6 include:
- Procedures for correcting eligible plan document failures, including complete or partial relief from the income inclusion and tax penalties under Section 409A. In some instances, a taxpayer may still be required to include up to 50% of the NQDC in income and pay the 20% penalty on that amount in order to be eligible for the correction program
- A transition period until December 31, 2010, to correct eligible document errors without paying the Section 409A taxes or penalties that are generally required as a condition for eligibility under the Document Correction Program
- Interpretive guidance regarding certain plan provisions that may or may not be considered plan document failures
- Clarification of certain provisions of the voluntary correction program for Section 409A operational errors (Notice 2008–113)
Because of the transition relief, you have a great final opportunity to find any remaining Section 409A plan document skeletons lingering in your company’s files. The IRS has stepped up issuing information document requests to employers for audits relating to Section 409A violations. The information document requests we have seen generally contain seventeen detailed requests relating to compliance with Section 409A. For example, request #1 states:
Identify each of the plans/arrangements and corresponding participants that provided the participant/service provider a legally binding right in one year to a payment of compensation in a subsequent year that is not a nonqualified compensation plan subject to §409A.
For all such identified plan(s)/arrangement(s), provide the basis for your position that such arrangement is not a [NQDC] plan subject to §409A.
Where such basis is that the plan/arrangement provides a short-term deferral, describe the terms of the arrangement including the terms of any relevant substantial risk of forfeiture.
That is just the first question! All employers will want to have the answers to that question before they receive a Section 409A information document request from the IRS. Subject to the transition relief discussed below, once the employer or employee¹ is under IRS examination for the relevant taxable year, the Section 409A Document Correction Program is no longer available for plan document failures in that taxable year or any prior taxable year in which the document failure existed.
This article will first provide a brief overview of the plan document requirements under Section 409A for NQDC plans. It will then review the types of plan document failures that can be corrected and the applicable correction procedures, interpretations and transition relief under Notice 2010–6.
PLAN DOCUMENT REQUIREMENTS UNDER SECTION 409A
The regulations under Section 409A require that a NQDC plan be established and maintained in one or more written documents that contain the material terms of the plan. The material terms include the amount, time and form of payment of the deferred compensation. A NQDC plan will be considered established when the participant obtains a legally binding right to a deferred payment, and the terms of the NQDC plan must be documented by the end of the taxable year in which the participant obtained the legally binding right to the payment (or by March 15th of the subsequent year if no payment is due the participant in the subsequent year). Other terms that must be in the written plan document include:
- Initial Deferral ElectionsIf a participant is permitted to make an election to defer compensation, the terms describing when the participant can make the election must be in the written plan document on or before the date the election must become irrevocable under Treasury Regulations Section 1.409A–2(a).
- Subsequent Deferral ElectionsIf participants will be allowed to make subsequent deferral elections, the authority to do so must be established in writing no later than the date the subsequent deferral election is required to become irrevocable under Treasury Regulations Section 1.409A–2(b).
- Six-Month Delay for Specified EmployeesFor publicly traded companies, the written plan document for NQDC must also provide that distributions to specified employees (as defined in Section 409A) may not be made until six months after the employee’s separation from service or, if earlier, the date of death. This provision must be set forth in writing on or before the date the employee first becomes a specified employee.
These terms were generally required to be included in the written plan document by December 31, 2008.
NOTICE 2010–6 DOCUMENT CORRECTION PROGRAM
Taxpayers can rely on the Document Correction Program for taxable years beginning January 1, 2009. The modifications to Notice 2008–113 are effective for taxable years beginning January 1, 2010. The Treasury Department and IRS are requesting comments regarding other document failures that commonly occur and the methods to correct them. Any comments must be submitted by April 5, 2010.
The Document Correction Program does not apply to document failures relating to stock-based plans. In addition, IRS representatives have informally pointed out that the program cannot be used to fix plans that fail to comply with the short-term deferral rule. After the transition periods discussed below, the program will also not apply to document failures resulting from linked NQDC plans or NQDC plans under IRS examination.
Before a taxpayer can take advantage of any of the correction methods available under the Document Correction Program, the taxpayer must meet certain general eligibility criteria, which include:
Commercially Reasonable Due Diligence
The employer must take “commercially reasonable” steps to identify all other NQDC plans that have a document failure that is substantially similar to the document failure being corrected and correct all the NQDC plans with the substantially similar failure.
Subject to the transition relief discussed below, the Document Correction Program is not available if a tax return of the employee or the employer is under examination with respect to the NQDC for any taxable year in which the document failure existed. An individual is treated as under examination if that individual’s Form 1040 for the taxable year is under examination. An entity is treated as under examination for a taxable year if it receives notification specifically citing NQDC as an issue under consideration (e.g. by receipt of an information document request). However, if a correction is completed under the Document Correction Program prior to the date a particular tax return is subject to examination, the document correction will remain eligible for relief under the Document Correction Program. Therefore, taxpayers are encouraged to correct any plan document errors early, before an IRS examination is initiated. There is limited transitional relief (as discussed below) regarding entities that were under IRS examination for taxable years prior to December 31, 2011.
Only NQDC plan document failures that are inadvertent or unintentional are eligible for relief.
Payment of Taxes and Penalties
A plan document correction will not be considered eligible for correction unless the taxpayer includes in income all amounts required under the Document Correction Program, including all federal income tax and the additional 20% tax, but not the premium interest. As discussed below, the Document Correction Program will generally limit or completely eliminate any tax or penalties once the correction program is completed. However, under certain circumstances, income taxes and/or a penalty must be paid to complete a particular correction method.
Information and Reporting Requirements
The employer must comply with the information and reporting requirements under the Document Correction Program.
The Document Correction Program states that the burden of proof is on the taxpayer (i.e., the employee) to demonstrate that he or she is eligible for the program and that he or she has met the requirements of the applicable correction method under the program (discussed below) and that he or she has satisfied the information and reporting requirements of the program (also discussed below).
Ambiguous Plan Terms
- “As Soon as Practicable” or Substantially Similar LanguageINTERPRETATION: If a NQDC plan designates a permissible payment event, but states that the payment will be made “as soon as practicable” (or other substantially similar language) after the permissible payment date, then the Document Correction Program states that the plan will be interpreted as having a specific payment date. The payment must be made by the later of the end of the taxable year in which the specific event occurs or the 15th day of the third calendar month following the permissible payment event.EXCEPTION: If the employer has a “pattern or practice of making late payments,” then that plan (and any plan of the employer with the same or similar language) will be treated as failing to designate a permissible payment date in the written plan document.
- Permissible Payment Event with no Definition or Ambiguous DefinitionMany NQDC plans have payment events that are either undefined or not defined consistent with the requirements under Section 409A. For example, the plan may state that a payment is to be made upon a “termination of employment,” which event could be interpreted to mean only those events that are a “separation from service” (a permissible payment event and defined term under Section 409A) or to mean additional events that do not meet the Section 409A definition of separation from service.INTERPRETATION: The Document Correction Program clarifies that if the NQDC plan contains a provision requiring the plan to be interpreted consistent with the requirements of Section 409A, then this correction method does not apply and no correction is required because the provision is not ambiguous. However, if the plan provision has been interpreted by the employer such that a pattern or practice has been established that is not consistent with Section 409A, or by a court with appropriate jurisdiction, with the same result, then the provision will not be treated as ambiguous and this correction method also does not apply (see below for correction method for impermissible definitions).
CORRECTION: If the plan does have an undefined or ambiguously defined permissible payment event, then the plan can be corrected either by adding a provision stating that the plan will be interpreted as necessary to comply with Section 409A or by including explicit definitions of the payment events that comply with Section 409A. However, in either case the amendment cannot have the effect of expanding or narrowing the events that constitute a permissible payment event. In addition, if a plan with undefined or ambiguously defined payment events has made payments that do not comply with the requirements of Section 409A, those improper payments can be corrected as operational failures under Notice 2008–113, if the plan is also corrected in the year that the operational failure is corrected.
Impermissible Definitions of Permissible Payment Events
This correction method applies if a NQDC plan has permissible payment events (i.e., separation from service, change in control event, death or disability) that are not defined in the plan document consistent with Section 409A. For example, the regulations under Section 409A generally provide that a transfer of employment from an 80% controlled subsidiary to the parent company would not be considered a separation from service. Therefore, if the terms of a NQDC plan permitted payment upon a separation from service as defined under those regulations, but also permitted a payment upon transfer to the controlled subsidiary, then the NQDC plan has an impermissible definition of separation from service.
CORRECTION: The impermissible definition may be corrected before the payment event occurs by amending the plan to provide for a payment event that satisfies Section 409A. However, the amendment cannot have the effect of adding or eliminating any events that constitute a payment event. The amendment must be effective immediately. If within one year following the date of the correction, either:
- an event occurs that would have been a permissible payment event under Section 409A, but not under the incorrect definition; or
- an event occurs that would have been a payment event under the incorrect definition, but not permissible under Section 409A; and
- that event results in the corrected plan provision being applied either to avoid a payment that would have been due under the incorrect definition or to make a payment that would not have been due under the incorrect definition,
then 50% of the amount deferred under the NQDC plan must be included in income in the employee’s taxable year in which the event occurs.
Whenever the Document Correction Program requires that an amount must be included in income, the taxpayer must also pay the 20% additional tax under Section 409A on the amount required to be included in income for the applicable tax year.
Special Exception for Change in Control Event
If the impermissible definition relates to a change in control event, and the change in control event occurs within the one-year look-back period, only 25% of the amount of the deferred compensation is required to be included in income.
Special Exceptions for Disability
With respect to an impermissible definition that relates an employee’s disability, the plan can be corrected either by removing the payment date or by correcting the definition. Also, with respect to a disability, the plan may still be amended after an event occurs that would be a disability payment event under the NQDC plan, if the entire amount payable under the plan due to the disability would be eligible for correction under Notice 2008–113 by treating the plan as having a compliant plan provision and the payment is treated as an operational error.
Based on the transition relief discussed later in this article, these one-year “look back” penalties, which are included in many of the correction methods throughout the Document Correction Program, are not applicable if the NQDC plan is corrected on or before December 31, 2010.
Impermissible Payment Periods Following a Permissible Payment Event
- Incorrect Grace PeriodThe Section 409A regulations generally provide that after a permissible payment event, there is a grace period of the later of 90 days or the end of the taxable year in which the payment event occurred. This correction method applies if the NQDC plan document provides for a grace period that is longer than the grace period permitted under Section 409A.CORRECTION: The NQDC plan can be corrected prior to the occurrence of the permissible payment by either deleting the impermissible period after the permissible payment event or by amending the period after the permissible payment event to comply with the grace period permitted under Section 409A. In this case, no amount of income is includible in the year of the plan document failure or in the year of the permissible payment event. The NQDC plan can also be amended within a reasonable time after the permissible payment event if:
- the payment is actually made within the applicable Section 409A grace period; and
- the employee includes 50% of the amount deferred under the plan in income in the taxable year in which the permissible payment event occurred.
- Permissible Payment Events Dependent on Service Provider’s Employment-Related Actions (i.e., Signing a Release of Claims)Many times the payment date under a severance plan is conditioned on the execution and return of a noncompetition agreement, nonsolicitation agreement or a release of claims. In the Document Correction Program, the IRS has taken the position that any ability of the employee to delay or accelerate the timing of a deferred payment based on the employee completing an employment-related action is an impermissible payment period.CORRECTION: Before the payment date occurs under the NQDC plan, the plan can be corrected by:
- removing the provision;
- providing that the payment will be made on the last date of the payment period already designated; or
- if a period is not designated, providing that the payment will be either 60 or 90 days after the payment event.
The amendment may not otherwise change the form or timing of the payment. After the payment event occurs, there is no documentary correction available.
Impermissible Payment Events and Payment Schedules
- NQDC Plans with Permissible and Impermissible Payment EventsThis correction method applies where a NQDC plan contains one or more permissible payment events under Section 409A and one or more impermissible payment events. However, it does not apply if the service provider or service recipient have discretion to determine if the payment event has occurred or will occur.CORRECTION:
- Prior to Election of Impermissible Payment EventBefore the date that an employee elects an impermissible payment event or before an impermissible payment event is applicable to an amount deferred by the employee, the NQDC plan can be amended by removing the impermissible payment event. Although this correction method applies based on an individual employee’s election, in order to be eligible for the correction method the employer must take all commercially reasonable steps to identify and correct all substantially similar language in other plans of the employer, which could include other participants in the plan.
- After Election of Impermissible Payment EventAfter an employee has irrevocably elected an impermissible payment event, the plan can be corrected before the date any impermissible payment event occurs by amending the plan to delete the impermissible payment event. However, if within one year of the correction any of the impermissible payment events that were deleted occur, then 50% of the amount deferred under the plan must be included in income by the affected employee in the taxable year in which the impermissible payment event occurs.
- Plans with Only Impermissible Payment EventsThis correction method can be used if the NQDC plan contains solely payment events that are impermissible under Section 409A.CORRECTION: Prior to the date an impermissible payment event occurs, the plan can be amended by deleting all impermissible payment events and replacing those provisions with a provision providing for payment upon the later of the employee’s separation from service or the sixth anniversary of the date of the correction. In addition, the employee must include in income 50% of the amount deferred under the pre-correction plan in the year in which the correction is completed.
Impermissible Alternative Payment Schedules
Section 409A generally permits only one form or time of payment for each permissible payment event. This correction method can be used if a NQDC plan contains multiple forms or times of payment for a single permissible payment event.
- Separation from ServiceIf a NQDC plan contains multiple times or forms of payment related to an employee’s separation from service, the plan can be corrected before the occurrence of the separation from service to provide that the form of payment upon a voluntary separation of service will be the same form of payment as for an involuntary separation from service under the precorrection plan document.
- Alternative Payment Schedules Other Than Separation from ServiceIf the NQDC plan contains alternative payment schedules based on payment events other than separation from service, then the plan can be amended before the payment event occurs that could result in impermissible multiple forms of payment. The plan would be amended to delete the forms of payment resulting in the earliest payment (or anticipated earliest payment) until the plan no longer contains impermissible multiple forms of payment.
In both of the above circumstances, if within one year following the date of the amendment the employee has a voluntary separation from service and the plan amendment is applied to avoid a form of payment that would have been required under the pre-correction plan, then 50% of the amount deferred under the pre-correction plan must be included in income in the taxable year in which the payment event occurs.
Impermissible Service Provider or Service Recipient Discretion
Generally, Section 409A prohibits an employee or employer from exercising discretion to change the time and form of a payment due under a NQDC plan upon the occurrences of a permissible payment event.
- the NQDC plan contains a default permissible payment time or form of payment that would be in effect if no discretion is exercised; and
- after the payment event occurs no discretion can be exercised to change the time or form of payment; and
- no discretion has been exercised (or any discretion exercised is revoked not less than one year before the date the payment event occurs) under the NQDC plan,
then the NQDC plan will not be treated as failing the plan document requirements under the Section 409A solely due to the provisions in the plan permitting an exercise of discretion.
CORRECTION: If the NQDC plan does not meet the interpretation above:
- With Default ProvisionIf the plan contains a default payment date, then the plan can be amended to delete the employee and employer impermissible discretion from the plan.
- No Default ProvisionIf the plan does not contain a default provision, then the plan can be amended to delete the impermissible discretion and provide that the time or form of payment will be the potential time or form of payment under the terms of the pre-correction plan that would result in the latest final payment date (or potentially latest if more than one payment form or time could result in the same payment date).
- Plan with Substantially Similar ProvisionIf an employee participates in a NQDC plan, and:
- discretion has been exercised under a separate NQDC plan of the same employer with a substantially similar discretionary provision;
- discretion has already been exercised to change the time or form of payments under the plan; and
- such discretion has not been revoked within one year of the date the applicable payment event occurs,
then the service recipient must take commercially reasonable steps to identify and correct all substantially similar provisions under all NQDC plans of the employer.
- Payment AccelerationIf an employer has discretion to accelerate a payment before the payment date, then before the earlier of the date the employer exercises its discretion to accelerate the payment and such discretion is irrevocable, or the date the payment is made pursuant to the exercise of discretion, the plan may be amended to remove impermissible discretion to accelerate the payment. Note that under Section 409A, there are several delineated events (such as payment pursuant to a QDRO or termination of the NQDC plan) under which payment acceleration is permissible, but discussion of those events here is outside the scope of this article.
- Impermissible Reimbursement or In-Kind BenefitsUnless the reimbursements or in-kind benefits are provided within the short-term deferral exemption to Section 409A, the reimbursement program or in-kind benefit program must be designed to comply with the requirements of Section 409A. If an employer has failed to design such a program to meet the requirements under Section 409A, the reimbursement program or in-kind benefit program may now be corrected as long as the amount eligible for reimbursement or the in-kind benefits are allocated pro rata to the number of years during which the employee may be eligible to receive such benefits. The time period that the employee is eligible to receive the benefits may not be amended as part of the correction method. If the benefits can be provided over the employee’s lifetime, the amount must be pro rated over the employee’s life expectancy. If within one year following the date of the amendment an event occurs that creates a right for the employee to reimbursement under the plan, and the plan amendment is applied to avoid or reduce the amount of the reimbursement or benefits that would have been required under the pre-correction plan, then 50% of the amount deferred under the pre-correction plan must be included in income in the taxable year in which the even occurs.
Failure to Include Six-Month Delay for Payments to Specified Employees
As explained above, Section 409A requires that a NQDC plan state in writing that a payment cannot be made to a specified employee until six months after the date of his or her separation from service or, if earlier, his or her death.
CORRECTION: If a NQDC plan fails to include the six-month delay rule, then the plan can be amended to provide that the payment will be made by the later of:
- 18 months after the date of the correction; or
- six months after the date of the applicable payment event.
The amendment must be effective immediately. The amendment will not be treated as a subsequent change in the time or form of payment under Treasury Regulations Section 1.409A–2(b). If a specified employee has a separation from service within one year of the effective date of the amendment and the amendment is applied to delay payment under the amended plan, then 50% of the amount deferred under the pre-corrected plan must be included in income in the employee’s taxable year in which the separation from service occurs.
Impermissible Initial Deferral Election Provisions in Plan Document
This correction method applies if the NQDC plan provisions do not comply with the initial deferral election rules under Section 409A (other than impermissible discretion by the employee or employer which must be corrected as described earlier). This correction method does not apply to a plan provision relating to changing the time or form of plan distributions.
INTERPRETATION: If the initial election provision has not been applied, then the mere fact that the NQDC plan contains the provision does not mean that an employee must take the amount deferred under the NQCD plan into income under Section 409A.
CORRECTION: If the initial election provision has been applied and has become irrevocable, then the plan can be corrected no later than the end of the service provider’s second taxable year immediately following the taxable year in which the election become irrevocable, by removing the provisions that permit an impermissible initial deferral election. However, any amounts that were not paid during a taxpayer’s taxable years due to the impermissible initial deferral election must be corrected as an operational failure under Notice 2008–113. For that purpose, even if the plan is corrected the correction will not have retroactive effect on amounts deferred under the same provision for any previous year, but will remain a plan document failure and the resulting deferral will remain an operational failure.
First Year After Adoption of NQDC Plan
If a NQDC plan is eligible for correction under the Document Correction Program, then it can be corrected not later than the end of the calendar year including, or the 15th day of the third month following, the date the first legally binding right to compensation arose under the NQDC plan, including all other plans of the employer that would be aggregated under Section 409A. If the NQDC plan qualifies for this relief, then the one-year look back rule in any correction method for including a portion of the deferred compensation will not apply, provided that any amounts that were paid that would not have been paid under the corrected plan are treated as operational failures and corrected under Notice 2008–113. For purposes of aggregating plans, any plan that is not subject to Section 409A (such as a grandfathered plan) and any plan under which all benefits have been paid or forfeited can be disregarded.
Document Corrections Made Prior to December 31, 2010
In the case of a NQDC plan that is otherwise eligible to be corrected under the Document Correction Program:
- if the document failure is corrected on or before December 31, 2010; and
- any payment made before December 31, 2010, that would not have been made under the corrected plan (or any payment not made by December 31, 2010, that would not have been made under the corrected plan) is treated as an operational error and corrected under Notice 2008–113,
then the plan will be treated as having been corrected on January 1, 2009, and any income inclusion requirement as a condition to a correction under the program (e.g., the one-year look back penalties) will not apply.
Linked NQDC Plans
In general, there is no correction method under the Document Correction Program for a plan document failure that results from a payment date acceleration because the amount, time or form of payment of the NQDC plan is affected by the amount paid under, or the payment provisions of, of another NQDC plan. However, the Document Correction Program provides that such “linked” NQDC plans can be corrected until December 31, 2011, by amending the plans to make the time or form of payment under both plans identical.
Payment Schedules Determined by the Payments Received by the Service Recipient
The Section 409A regulations contain a special timing rule for deferred compensation paid to an employee based on the timing of a payment received by the employer. If the arrangement between the employer and employee does not comply with these rules, the plan can be corrected by December 31, 2011, and any payments made under the plan since January 1, 2009, that would not have been made under the corrected plan are treated as operational failures and corrected under Notice 2008–113 on or before December 31. 2011.
Service Recipients under IRS Examination on or Before December 31, 2011
As discussed above, once a service recipient is under IRS examination with respect to issues relating to deferred compensation, a taxpayer will no longer qualify for the relief permitted under the Document Correction Program. However, for a non-individual employer that is under examination for periods before December 31, 2011, the employer will only be treated as under examination with respect to any specific document failure that has been identified as an issue under examination. A document failure will be treated as being specifically identified in an IRS examination if the plan provision is identified as a provision that will have resulted in a document failure if the provision was not amended before the beginning of the first taxable year beginning on or after January 1, 2009.
Information and Reporting Requirements
To be eligible for the Document Correction Program, including the transition relief provisions, employers and employees must comply with the following information and reporting requirements.
For the taxable year in which a correction is made, and for the subsequent tax year if the employee is required to include an amount of income under the program, the employer must attach to its timely-filed original federal income tax return a statement with the information described below. A timely-filed return includes applicable extensions.
- The name and tax payer identification number of the employee affected by the document failure
- The identity of the NQDC plan with respect to the document failure
- A statement:
- that the document failure is eligible for correction (including the applicable section of Notice 2010–6);
- that the service recipient has taken all actions required and otherwise met all requirements for such correction by the end of the service recipient’s taxable year;
- providing the last day of the subsequent taxable year of the service recipient during which an amount is required to be includible in income under Section 409A by the service provider; and
- providing the date of the correction and the date of any event causing the inclusion of income under Section 409A by the service provider
- stating the amount of each failure and, if applicable, the amount reported by the service recipient as includible income under Section 409A, including the percentage of the amount involved in each document failure required to be included in income as part of the correction.
In addition, the employer must provide the employee information statement described below to an employee for the year of the correction, and for the subsequent year if the employee must include any amount in income in a subsequent year. The information statement must be provided to the employee not later than the date the employer would be required to provide to the employee an information return (Form W-2 or 1099) for the applicable taxable year, or if no information return is required to be provided, then not later than January 31 following the calendar year of the applicable taxable year.
The employee must attach a copy of the information statement described below to the employee’s timely-filed original federal income tax return in the year of the correction and, if applicable, in the year the employee includes any amount in income under Section 409A. If a taxpayer comes under examination after completing a correction procedure under Notice 2010–6, the taxpayer is required to make reasonable efforts to notify the examiner of the taxpayer’s reliance on the correction program.
- A statement, provided by the employer, that the employee is entitled to relief under the Document Correction Program (including the specified section relied upon) and that the employee must attach a copy of the statement to his or her income tax return for the year of the correction and, if applicable, in the year that the employee is required to include any amount in income under Section 409A.
- The information contained in the statement attached to the employer’s federal income tax return, as described above.
Clarifications of Notice 2008–113
Notice 2010–6 clarifies certain provisions of Notice 2008– 113, including the following:
- The amount that must be repaid under Notice 2008–113 to a service recipient in the event of an erroneous payment to a service provider is the gross amount of the payment before application of any withholding requirements.
- Failure to pay an amount owed until the calendar year immediately following the year in which it is owed should be treated as an excess deferred amount corrected in the taxable year immediately following the year of the failure.
¹ Section 409A applies to a wide variety of service providers (including certain independent contractors, outside directors and personal service corporations). For simplicity, this article uses the terms “employer” and “employee.”