Deferred Compensation Amnesty Window

January 7, 2010

The IRS just issued Notice 2010-6, which contains procedures for voluntarily correcting many types of failures to comply with the document requirements that apply to nonqualified deferred compensation plans under Section 409A of the Internal Revenue Code. (For those of you with a lot of time on your hands, Notice 2010-6 follows this Alert.)

Many employment agreements contain deferred compensation arrangements that are not immediately obvious, such as expense reimbursement plans, stock options (or other stock rights) and severance. Similarly, many of the compliance failures would not be readily apparent since they are often counter-intuitive. Some of the most common “hidden” failures include:

  • Non-compliant definition of “termination” or “separation from service”

  • Non-compliant definition of “Good Cause”

  • Non-compliant definition of “disability”

  • Tying severance payments to employee’s execution of release

  • Timing of annual bonus payments

Given this window of relief being offered by the IRS, now is a good time to review all such employment agreements, severance arrangements, bonus plans and equity compensation agreements, especially as they relate to key executives where the dollar amounts are significant. While the penalties involved are generally imposed upon the employee, there are some penalties that may also be imposed on the employer for failure to report and withhold on income in the proper tax year.

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