Notice 2007-100

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IRS Notice 2007-100, which has been obsoleted by Notice 2008-113, provided transition relief and guidance on the correction of certain failures of a nonqualified deferred compensation plan to comply with 409A(a) in operation (an operational failure). This transition relief and additional guidance included:

  • 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).
  • 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.
  • An outline of, and request for comments on, a potential corrections program that would permit service recipients and service providers to limit the amounts required to be included in income under § 409A(a) due to certain operational failures.

Table of Contents


Contents

Limits of Relief

Relief under the Notice is limited to operational errors, and does not include design failures.

Relief is not available under the Notice for any intentional failure to comply with the terms of a plan or the requirements of § 409A in the operation of a plan. The relief provided also is not available with respect to an operational failure that is egregious, or where the failure is related to participation in an abusive tax avoidance transaction (meaning any listed transaction under § 1.6011-4(b)(2)).

Relief is also not available for any exercise of a stock right that results in a failure to comply with § 409A; e.g., for discounted stock options that have already been exercised.

Procedures for Complete Correction Within Taxable Year

Notice 2007-100 only permits complete correction of operational failures within the tax year of the participant (which is almost certainly the calendar year). Generally, no correction is permitted unless the employer takes commercially reasonable steps to eliminate future errors.

Improper Distributions and Failures to Defer

Generally, a failure to defer or an erroneous distribution may be corrected through repayment by the end of year. "Insiders" whose erroneous distributions exceeded the 402(g) elective deferral limits, however, must also pay interest to the service recipient from the date of the erroneous payment to the date of repayment at the short-term applicable Federal rate (AFR) under § 1274(d)(1). (An insider is a director or officer of the service recipient or one who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security of the service recipient.)

Repayments may be made through salary reduction. This relief is not available if the employer's ability to pay appeared to be in serious danger suring the tax year.

Distributions to Specified Employees

Distributions to specified employees that are not delayed six months may be repaid before the end of the tax year. The number of days from the erroneous distribution until the repayment must be added on to the later of

  • the date the distribution should have been made, or
  • the date on which repayment occured

to determine the proper distribution date.

This relief is not available if the employer's ability to pay appeared to be in serious danger during the tax year.

Improper Deferrals

Improper deferrals may be corrected through distribution before the end of the year. "Insiders" must also forfeit any positive earnings from the improper deferral. Losses may be repaid, and the employer may also pay interest on the improper deferral.

Stock Rights

Stock rights that are granted "in the money" may be adjusted to a FMV at the time of grant before they are exercised (but not after). Adjusted stock rights are not considered deferred compensation.

Notices

An employer that uses the procedures described above must attach to its timely-filed (including extensions) original federal income tax return for its taxable year in which the failure occurred a statement entitled “§ 409A Relief under § II of Notice 2007-100.” This statement must include:

a. The name and taxpayer identification number of each service provider affected by the failure and whether such service provider is an insider with respect to the service recipient.

b. Identification of the nonqualified deferred compensation plan with respect to which such failure occurred.

c. A brief description of the failure and the circumstances under which it occurred, including the amount involved and date on which the failure occurred.

d. A brief description of the steps taken to correct the failure and the date on which such correction was completed.

e. A statement that the operational failure is eligible for the correction under the terms of Notice 2007-100, and that the service recipient has taken all actions required, and otherwise met all requirements, for such correction.

The employer must also notify the affected participant that he or she is entitled to the relief provided by the Notice with respect to a failure to comply with § 409A, and items b through e above.

Transitional Relief Providing Limited Penalties

Notice 2007-100 provides that certain operational failures may result in limited 409A penalties if reported and/or corrected after the end of year in which they occur.

Failures to Defer and Erroneous Distributions

Before January 1, 2010, the penalties applicable to an unintentional operational failure that involves a failure to defer or an erroneous distribution may be limited if:

(1) It is an amount should have been treated as deferred compensation under the terms of the plan and any applicable deferral election, and § 409A and the applicable guidance, but the amount was not credited to the service provider’s account or otherwise treated as deferred compensation during the service provider’s taxable year, or did not remain deferred compensation after the end of such year;

(2) Because the amount was not credited to the service provider’s account or otherwise treated as deferred compensation under the plan during such year, or did not remain deferred compensation under the plan after the end of such year, the amount was paid or made available to the service provider during the service provider’s taxable year; and

(3) The amount paid or made available to the service provider does not exceed the limit on elective deferrals that would apply to a qualified plan under § 402(g)(1)(B) for the year of the operational failure.

If the above requirements are met, the amount includible in income under § 409A(a) as a result of such payment is limited to the amount that should have been treated as deferred compensation under the plan (or should have continued to be deferred compensation under the plan). In other words, only the compensation for which their was a failure is subject to 409A penalties, rather than all of the participant's deferred compensation. The service provider is required to pay the 20 percent excise tax, but is not required to pay the additional tax under § 409A(a)(1)(B)(i)(I) (the premium interest tax).

Erroneous Deferrals

Before January 1, 2010, the penalties applicable to an unintentional operational failure that involves an erroneous deferral may be limited if:

(1) Under the terms of the plan and any applicable deferral election, and § 409A and the applicable guidance, an amount of deferred compensation under the plan should have been paid or made available to the service provider during the service provider’s taxable year, or an amount is treated as deferred compensation under the plan that should have been paid or made available to the service provider during the service provider’s taxable year, but such amount is not paid or made available due to an unintentional operational failure with respect to the plan;

(2) The amount that should have been paid or made available to the service provider during that service provider’s taxable year does not exceed the limit on elective deferrals that would apply to a qualified plan under § 402(g)(1)(B) for such year;

(3) By the later of

  • the end of the service provider’s taxable year in which the failure is discovered, or
  • the fifteenth day of the third month following the date upon which the failure is discovered,

the service recipient pays the service provider the amount that should have been paid or made available to the service provider;

(4) any earnings allocable to the payments through the date of the payment are either forfeited or added to the payment to the service provider, and any losses allocable to such amounts through the date of the payment are either permanently disregarded or subtracted from the payment to the service provider, and the service recipient reports such payment on a Form W-2 or Form 1099, as applicable, in accordance with the requirements of the Notice; and

(5) The service provider includes such amount in income and pays the additional taxes under § 409A(a) as described in this section on a timely filed federal income tax return (including an income tax return filed in accordance with a timely request for extension, but not including an amended income tax return).

If the above requirements are met, the amount includible in income under § 409A(a) is limited to the amount that should not have been deferred. In other words, only the compensation for which their was a failure is subject to 409A penalties, rather than all of the participant's deferred compensation. In addition, the service provider is required to pay the 20 percent excise tax on the amount included in income, but is not required to pay the additional tax under § 409A(a)(1)(B)(i)(I) (the premium interest tax).

Notices

An employer that takes advantage of the relief described above must attach to its timely-filed (including extensions) original federal income tax return for its taxable year in which the failure occurred a statement entitled “§ 409A Relief under § III of Notice 2007-100.” This statement must include:

a. The name and taxpayer identification number of each service provider affected by the failure.

b. Identification of the nonqualified deferred compensation plan with respect to which such failure occurred.

c. A brief description of the failure and the circumstances under which it occurred, including the amount involved and date on which the failure occurred.

d. A brief description of the steps taken by the service recipient to avoid a recurrence of the failure, including the date on which such steps were implemented.

e. A statement that the operational failure is eligible for the correction under the terms of this notice, and that the service recipient has taken all actions required, and otherwise met all requirements, for such correction.

The employer must also notify the affected participant that he or she is entitled to the relief provided by the Notice with respect to a failure to comply with § 409A, and that the service provider must attach a copy of the statement to the service provider’s income tax return for the taxable year in which the failure was discovered. The employer must also provide them with items b through e above.

The participant must attach to the his or her income tax return a copy of the statement the service provider received from the service recipient with respect to each 409A failure.

Guidance

media:IRS_Notice_2007-100.pdf (PDF)

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