409A Corrections Guidance: Which Year Is Correction Completed?
Relief for nonqualified deferred compensation plan operational failures made pursuant to Internal Revenue Service guidance under Section 409A requires certain information reporting by affected employers and participants. It is important to promptly correct any discovered errors, as fewer requirements apply with respect to corrections of failures completed during the taxable year in which the failure occurs. For example, a failure corrected in December (same taxable year) may face fewer requirements than a correction completed in early January (a subsequent taxable year), even if the amount involved is less than the elective deferral limit. If the correction was made during the year after the operational failure, IRS guidance generally requires that the employer attach an information statement (with additional content) to its tax return for that year, and to provide an information statement to any affected participants (noting eligibility for relief being sought) by January 31st, and each taxpayer (i.e., employer and affected participant) must be prepared to note the statement, and the relief obtained, should the return be audited at a future date. If the correction was made during same taxable year as the operational failure, IRS 409A corrections guidance generally requires that the employer attach an information statement to its tax return for the year the failure was discovered, whenever timely filed. The employer also must be prepared to disclose the statement, and the relief obtained, should the corporate return be audited at a future date.