United States: Employers Must Act Quickly to Take Advantage of Limited Grace Period for Correcting Certain Operational Violations under Code Section 409A

Last Updated: November 5 2009
Article by Maureen J. Gorman and Rebecca C. Davenport

Originally published November 2, 2009

Keywords: Employers, employee benefits, internal revenue code section 409A, nonqualified deferred compensation arrangements, Notice 2008-113

Employers must act by the end of 2009 if they want to take advantage of transition relief provided by Notice 2008-113 (the Notice) for certain types of operational violations of the rules under Internal Revenue Code Section 409A that occurred prior to 2008. 

Section 409A. As discussed in many of our prior client alerts, Section 409A imposes adverse tax consequences on participants in nonqualified deferred compensation arrangements that fail in form or in operation to meet the requirements of Section 409A at any time during a taxable year. Those adverse consequences include the following:

  • The total amount deferred under the plan (and all plans of a similar type) for that year and all previous years is currently includible in income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.
  • An additional income tax is imposed equal to 20 percent of the deferred compensation.
  • An additional tax is imposed equal to the interest, calculated using the underpayment rate plus 1 percent, that would have been imposed during the deferral period on the underpayment amount that would have occurred if the deferred compensation had been includible in income when first deferred or, if later, when no longer subject to a substantial risk of forfeiture (often referred to as the premium interest tax).

Section 409A applies to independent contractors as well as employees. For simplicity we refer to these individuals collectively as "employees" and the entities for whom they perform services as "employers."

General Notice Relief. The Notice, which was issued in December 2008, permits the correction of certain limited categories of operational failures under Section 409A with varying degrees of relief from the sanctions of that Section, depending on the nature of the violation and the correction approach used. The Notice outlines the terms and conditions for the permitted corrections, prescribes information and reporting requirements that must be satisfied for relief, and outlines the tax consequences associated with different types of corrective action. In general, the following categories of failures are eligible for relief if corrected in the same taxable year (Same Taxable Year Correction): (i) a failure to defer an amount or incorrect payment of an amount payable in a subsequent year, (ii) the incorrect early payment of an amount payable in the same taxable year or a payment that fails to satisfy the required six-month delay for certain key employees following separation from service, (iii) the deferral of amounts that should not have been deferred or treated as deferred compensation, and (iv) the correction of the exercise price of otherwise excluded stock rights. 

In addition, provided that the employee was not an insider at any time during the employee's taxable year in which the failure occurred, or at any time during the immediately following taxable year, those same categories of failures are eligible for correction under the Notice if corrected no later than the end of the taxable year following the taxable year in which the error occurred (Subsequent Taxable Year Correction). An "insider" is defined as a director or officer of the employer, or direct or indirect beneficial owner of 10% or more of any class of equity security of the employer determined in accordance with the rules under Section 16 of the Securities Exchange Act of 1934, without regard to whether the employer has any class of equity securities registered under Section 12 of such Act. Errors corrected under either the Same Taxable Year or Subsequent Taxable Year Correction approach are not subject to the 20 percent tax or the premium interest tax. The Notice also includes certain other correction approaches, but in general those approaches require correction by the end of the second taxable year after the taxable year in which the failure occurs and payment of the 20 percent tax. It should be noted that correction of each type of failure under any of the approaches provided by the Notice must satisfy numerous requirements not described in this alert.

Limited Transition Relief under the Notice. Section VIII of the Notice contains a special transition rule that is available only for employees who were not insiders at any time during the employee's taxable year in which the failure occurred. Under the transition relief, for purposes of correcting an operational failure of the type described in clauses (i), (ii) or (iii) above that occurred on or before December 31, 2007, the employee's taxable year ending in 2009 will be treated as the taxable year next following the taxable year in which the failure occurred. Thus, an employer may correct, in 2009, an error that occurred before 2008 and treat such correction as a Subsequent Taxable Year Correction (thereby avoiding the 20 percent tax), provided that the other terms and conditions of the Subsequent Taxable Year Correction approach are satisfied. (The Notice contains a related liberalization of one of the conditions of the Subsequent Taxable Year Correction approach for certain premature distributions.)

The special transition relief period ends December 31, 2009, and is not available for errors committed in 2008; hence, employers who wish to take advantage of the Subsequent Taxable Year Correction approach for an error occurring in 2008 (and to avoid the 20 percent tax), must also make such a correction by December 31, 2009.

Learn more about our Employment and Executive Compensation practices.

Visit us at www.mayerbrown.com.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2009. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions