Notice 2010-6

Part III. Administrative, Procedural, and Miscellaneous
Relief and Guidance on
Corrections of Certain
Failures of a Nonqualified
Deferred Compensation Plan
to Comply with § 409A(a)
Notice 2010–6
TABLE OF CONTENTS
I. Purpose
II. Background
III. Eligibility Requirements and Effect of Correction
A. In General
B. Correction of Plans Containing Substantially Similar Document Failures
C. Relief not Available to Service Providers and Certain Service Recipients Under Examination
D. Relief not Available for Intentional Failures or Listed Transactions
E. Amounts Included in Income as a Condition of Correction
F. Date of Correction; Determining Certain Periods
G. Linked Plans and Stock Rights not Eligible for Relief
H. New or Modified Payment Events Required as a Condition of Correction
I. Effect of Correction
J. References to the Internal Revenue Code; Certain Terms
IV. Application of § 409A(a) to Certain Ambiguous Plan Terms
A. Terms Providing for a Payment “As Soon as Practicable” or Substantially Similar Language Following a Permissible
Payment Event
B. Permissible Payment Event with no Definition or an Ambiguous Definition
C. Examples
V. Correction of Impermissible Definition of Otherwise Permissible Payment Events
A. Impermissible Definition of Separation from Service
B. Impermissible Definition of a Change in Control Event
C. Impermissible Definition of Disability
D. Examples
VI. Correction of Impermissible Payment Periods following a Permissible Payment Event
A. Payment Periods of Longer than 90 Days Following a Permissible Payment Event
B. Payment Periods Following a Permissible Payment Event Dependent upon the Service Provider Completing Certain
Employment-Related Actions
C. Examples
VII. Correction of Certain Impermissible Payment Events and Payment Schedules
A. Plans with Permissible and Impermissible Payment Events under § 409A
B. Plans with Only Impermissible Payment Events under § 409A
C. Certain Impermissible Alternative Payment Schedules
D. Impermissible Service Provider or Service Recipient Discretion with Respect to a Payment Schedule Following a
Permissible Payment Event (Including Impermissible Subsequent Deferral Elections)
E. Impermissible Service Recipient Discretion to Accelerate Payment Events
F. Impermissible Reimbursement or In-Kind Benefit Provisions
G. Examples
VIII. Correction of Failure to Include Six-Month Delay of Payment for Specified Employees
IX. Correction of Provisions Providing for Impermissible Initial Deferral Elections
X. Amendment Period Following a Service Recipient’s Initial Adoption of a Plan
XI. Transition Relief
A. Correction of Document Failures Described in this Notice
B. Correction of Impermissible Provisions Linking Nonqualified Deferred Compensation Plans

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C. Correction of Payment Schedules Determined by the Timing of Payments Received by the Service Recipient
D. Service Recipients Under Examination for Returns Covering Periods Beginning on or Before December 31, 2011
XII. Information and Reporting Requirements
A. Information Required for Correction of a Document Failure
B. Attachment to Service Recipient Tax Return for Failures Described in §§ V through XI of this Notice
C. Information to be Provided to Service Provider for Failures Described in §§ V through XI of this Notice
D. Attachment to Service Provider Tax Return for Failures Described in §§ V through XI of this Notice
XIII. Modifications to Notice 2008–113
XIV. Effect on Other Documents
XV. Request for Comments
XVI. Paperwork Reduction Act
XVII. Drafting Information
I. PURPOSE
This notice provides methods for taxpayers to voluntarily correct many types
of failures to comply with the document
requirements applicable under § 409A of
the Internal Revenue Code (Code) to nonqualified deferred compensation plans and
thereby avoid or reduce the current income inclusion and additional taxes under § 409A. This document correction program is intended to encourage taxpayers
to review nonqualified deferred compensation plans to identify provisions that fail
to comply with the requirements of § 409A
and § 1.409A–1(c) of the Income Tax Regulations (a document failure), and to correct those plan provisions promptly, while
also not providing an advantage to taxpayers participating in plans that initially fail
to comply with § 409A over taxpayers participating in plans drafted in compliance
with § 409A. Accordingly, this notice provides:

•
•

•

Clarification that certain language
commonly included in plan documents
will not cause a document failure.
Relief permitting correction of certain document failures without current
income inclusion or additional taxes
under § 409A, provided, in certain
circumstances, that the corrected plan
provision does not affect the operation
of the plan within one year following
the date of correction.
Relief limiting the amount currently
includible in income and the additional
taxes under § 409A for certain document failures if correction of the failure
affects the operation of the plan within
one year following the date of correction.

2010–3 I.R.B.

•

•

Relief permitting correction of certain document failures without current
income inclusion or additional taxes
under § 409A, if the plan is the service recipient’s first plan of that type
(disregarding any plans not subject
to § 409A or any plans under which
all deferred amounts have previously
been paid or forfeited) and the failure
is corrected within a limited period
following adoption of the plan.
Transition relief permitting corrections
of certain document failures without
current income inclusion or additional
taxes under § 409A, if the document
failure is corrected by December 31,
2010, and any operational failures resulting from the document failure are
also corrected in accordance with Notice 2008–113, 2008–51 I.R.B. 1305,
by December 31, 2010.

This notice also clarifies certain aspects
of Notice 2008–113, which addresses certain failures of nonqualified deferred compensation plans to comply with § 409A in
operation (operational failures), including
clarification of:

•
•

•

The application of the subsequent year
correction method to late payments of
amounts deferred.
The calculation of the amount that
must be paid to the service provider
as a correction of a late payment of
an amount deferred under a plan if
the payment would have been made in
property, such as shares of stock.
The calculation of the amount that
must be repaid by the service provider
as a correction of an early payment of
an amount deferred under a plan if the

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early payment was made in property,
such as shares of stock.
II. BACKGROUND
Section 409A was added to the Code by
§ 885 of the American Jobs Creation Act
of 2004, Public Law 108–357 (118 Stat.
1418). Section 409A generally provides
that, unless certain requirements are met,
amounts deferred under a nonqualified deferred compensation plan for all taxable
years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. Section 409A further provides that amounts includible in income under § 409A are subject to two additional taxes, a 20% additional tax and an
additional tax calculated as the underpayment interest determined at a premium interest rate that would have been due had
the amounts deferred been includible in income when first deferred or first no longer
subject to a substantial risk of forfeiture,
whichever is later. Thus, a failure to comply with the requirements of § 409A may
have severely adverse tax consequences.
Final regulations under § 409A were issued by the IRS and the Treasury Department on April 17, 2007 (T.D. 9321, 2007–1
C.B. 1123 [72 Fed. Reg. 19234]), effective for taxable years beginning on or after January 1, 2009 (see Notice 2007–86,
2007–2 C.B. 990).
A nonqualified deferred compensation
plan must comply with the requirements
of § 409A both in form and in operation. On December 3, 2008, the Treasury
Department and the IRS issued Notice
2008–113, setting forth guidance permitting the correction of certain operational
failures, and providing transition relief

January 19, 2010

limiting the amount includible in income
under § 409A(a) for certain operational
failures involving limited amounts. Notice
2008–113 also provided guidance limiting
the amount includible in income under
§ 409A(a) for certain operational failures
involving amounts that exceeded the limit.
Notice 2008–113 requested comments
with respect to potential guidance permitting the correction of document failures. In
response, the Treasury Department and the
IRS received various comments requesting that relief also be available for document failures and containing suggestions
for corrections. The Treasury Department
and the IRS have reviewed all of the comments submitted and are issuing this notice to provide relief for numerous types of
document failures.
The Treasury Department and the IRS
are issuing this notice primarily to address document failures. Notice 2008–113
remains in effect to address operational
failures. However, § XIII of this notice
provides certain modifications to Notice
2008–113, clarifying certain aspects of
that notice, that are effective for service
provider taxable years beginning on or
after January 1, 2010. For further information regarding the effective dates, see
§ XIV of this notice.
III. ELIGIBILITY REQUIREMENTS
AND EFFECT OF CORRECTION
A. In General
A taxpayer is not eligible for the relief provided in §§ V through XI of this
notice for a document failure unless the
taxpayer demonstrates that all of the following requirements have been met: (i)
the requirements of this § III applicable to
the document failure; (ii) the requirements
of the particular section in §§ V through
XI of this notice providing the correction
method and relief applicable to the document failure; and (iii) the information and
reporting requirements of § XII of this notice. The taxpayer claiming the relief has
the burden of demonstrating eligibility for
the relief and that each of the requirements
in the preceding sentence have been met.
A taxpayer’s eligibility for the relief provided in this notice is subject to examination by the IRS.

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B. Correction of Plans Containing
Substantially Similar Document Failures
The relief provided in §§ V through XI
of this notice is not available with respect
to a plan for which a document failure has
been identified and corrected unless, in addition to satisfying the requirements of the
applicable sections of this notice, the service recipient takes commercially reasonable steps to: (i) identify all other nonqualified deferred compensation plans that
have a document failure that is substantially similar to the document failure initially identified and corrected (regardless
of whether the other plan provides deferred
compensation for any of the same service
providers that participate in the plan with
the initially identified and corrected document failure) and (ii) correct all such failures in a manner consistent with this notice.
C. Relief not Available to Service
Providers and Certain Service Recipients
Under Examination
Except where specifically noted in
this notice, the relief provided in §§ V
through XI of this notice is not available
for a service provider participating in a
nonqualified deferred compensation plan
if a federal income tax return of the service provider or a federal tax return of
the service recipient is under examination
with respect to nonqualified deferred compensation for any taxable year in which
the document failure existed. For this
purpose, an individual service provider
or service recipient is treated as under
examination with respect to nonqualified
deferred compensation if the individual
is under examination with respect to the
individual’s federal income tax return (for
example, Form 1040) for the taxable year.
Any other type of service provider or service recipient is treated as under examination with respect to nonqualified deferred
compensation if the service provider or
service recipient receives written notification (for example, by examination plan,
information document request (IDR), or
notification of proposed adjustments or
income tax examination changes) from
the examining agent(s) specifically citing nonqualified deferred compensation
as an issue under consideration. See
§ XI.D for certain transition relief through

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December 31, 2011, regarding federal
tax returns of non-individual service
recipients under examination.
A service provider and service recipient
will not fail to qualify for relief, however,
merely because the service provider or service recipient becomes under examination
with respect to nonqualified deferred compensation after the date of correction, if all
of the requirements of this notice for relief are otherwise satisfied and the service
provider and the service recipient were not
under examination on the date of the correction. For example, assume a document
failure exists during 2010 and 2011, but
not in any prior years. The date of correction of the document failure is January 1,
2012, at which time the federal tax returns
of the service provider and service recipient for 2010 and 2011 are not under examination. Provided that the service recipient
and service provider otherwise satisfy the
requirements of this notice (including any
requirements of inclusion of income, payment of additional taxes, reporting and taking commercially reasonable steps to identify and correct all plans with substantially
similar document failures), the document
failure will remain eligible for the relief so
that for purposes of any subsequent examination of the service provider’s or the service recipient’s federal tax returns for 2010
and 2011, the failure will be treated as corrected.
D. Relief not Available for Intentional
Failures or Listed Transactions
The relief provided in §§ V through XI
of this notice applies only to failures to
comply with the plan document requirements under § 409A(a) and § 1.409A–1(c)
that are inadvertent and unintentional. In
addition, the relief provided in this notice
is not available if the failure is directly
or indirectly related to participation in any
listed transaction under §1.6011–4(b)(2)).
E. Amounts Included in Income as a
Condition of Correction
If the applicable section of this notice
under which the correction is made requires that the service provider include
an amount deferred in income under
§ 409A(a), the relief provided under such
section is conditioned upon (i) the service provider including the amount in
income on the appropriate tax return and

2010–3 I.R.B.

paying all applicable Federal taxes, including the additional 20% tax under
§ 409A(a)(1)(B)(i)(II) but not the premium
interest tax under § 409A(a)(1)(B)(i)(I),
and (ii) the service recipient complying
with the information statement reporting
requirements set forth in the applicable
section of this notice (for example, Form
W–2 reporting). Provided that the service
provider has actually included the amount
in income under § 409A(a) pursuant to
the applicable section of this notice and
paid the additional tax due on such amount
under § 409A(a)(1)(B)(i)(II), the amount
included in income will be treated for all
subsequent periods as an amount previously included in income for purposes of
§ 409A(c) and the regulations thereunder.
If the applicable section of this notice
under which the correction is made requires that the service provider include
an amount deferred in income under
§ 409A(a), such as 50% of the amount deferred under the plan, the amount deferred
to which the income inclusion requirement
applies is only the amount deferred to
which the corrected plan provision applies,
and the calculation of the amount deferred
is based upon the plan provision in effect
immediately before the correction.
F. Date of Correction; Income Inclusion
Upon Correction of Multiple Failures
For purposes of this notice, the date of
correction of a document failure is the latest of the date on which the correction is
adopted, the date on which the correction
is effective and the date on which the correction is set forth in writing in one or more
documents. Under many sections of this
notice the most favorable relief is available
only if certain events do not occur within
one year following the date of the correction. For purposes of applying this notice,
one year following a date means the period beginning on such date and ending on
the first anniversary of such date. For example, one year following April 1, 2010,
means April 1, 2011.
Special rules apply if two or more document failures that apply to the same deferred amount under a plan are corrected,
and two or more of the sections of this notice pursuant to which the corrections are
made with respect to that deferred amount
require as a condition of the correction that
the service provider include a percentage

2010–3 I.R.B.

of the amount deferred in income under
§ 409A. In that situation, if two or more
sections of this notice would require a percentage of the amount deferred to be included in income in the same taxable year,
the service provider is only required to include in income, and the service recipient
is only required to report as income to the
service provider, the percentage of the deferred amount required to be included in
income under the section of this notice pursuant to which a correction is made with
respect to that deferred amount that requires the largest percentage to be included
in income for that taxable year. For example, if application of each of two document
corrections to the same deferred amount
would require that the service provider include 50% of the deferred amount subject
to the corrected plan provision in income
under § 409A during the same taxable year
as a condition of each correction, the service provider will only be required to include 50% of the deferred amount in income under § 409A (and not 100%).
If, in the situation described in the first
sentence of the preceding paragraph, the
applicable sections of this notice would require a percentage of the amount deferred
to be included in income under § 409A as
a condition of correction in two or more
taxable years, then, solely for purposes of
determining the amount deferred that must
be included in income under § 409A as a
condition of correction in a taxable year
after the first taxable year in which such
an inclusion is required as a condition of
correction, the service provider may treat
two times the amount included in income
under § 409A as a condition of correction
in a prior taxable year with respect to the
amount deferred as previously included in
income. For example, assume that an employee is entitled to a payment upon a separation from service that includes any reduction in the level of services provided,
payable at the discretion of the employer
over a period not to exceed three years.
On April 1, 2011, the employer corrects
the definition of the term “separation from
service” but the employee has a reduction in services on June 1, 2011 (within
one year of the correction) so that the employee is required to include in income under § 409A as a condition of correction
50% of the $100x deferred under the plan,
or $50x. On April 1, 2012, the employer
corrects the impermissible discretion with

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respect to the payment schedule following the permissible payment event. The
employee separates from service on August 1, 2012 (within one year of the correction) so that the employee is required to
include in income under § 409A as a condition of correction 50% of the amount deferred under the plan subject to the provision. However, solely for this purpose, the
employee is entitled to treat two times the
$50x included in income during 2011, or
$100x, as previously included in income.
Assume that the amount deferred under the
plan for 2012 subject to the provision is
$150x. Solely for purposes of determining
the amount that must be included as a condition of correction, the $150x is reduced
by the $100x deemed to be previously included in income. Accordingly, the employee must include $25x (50% x 50x) in
income under § 409A as a condition of the
second correction.
G. Linked Plans and Stock Rights not
Eligible for Relief
Except as specifically provided in
§ XI.B of this notice, the relief provided
under this notice does not apply to a plan
to the extent that the document failure
is due to the amount deferred under the
plan being determined by, or the time or
form of payment being affected by, the
amount deferred under, or the payment
provisions of, one or more other nonqualified deferred compensation plans or
one or more qualified plans (as defined in
§ 1.409A–1(a)(2)). In addition, the relief
provided under this notice does not apply
to a stock right. For certain relief with respect to a stock right with an exercise price
that is less than the fair market value of
the underlying shares of stock at the date
of grant, see Notice 2008–113, §§ IV.D
and V.E.
H. New or Modified Payment Events
Required as a Condition of Correction
Many of the corrections available under
this notice are conditioned upon the plan
being amended to adopt a new or modified payment event for an amount deferred.
Nothing in these conditions is intended to
prohibit or alter the ability of the plan to
be modified at any time to include death,
disability or an unforeseeable emergency
as a payment event (see § 1.409A–3(i)(3)),

January 19, 2010

or to adopt any of the permissible exceptions to the rule prohibiting accelerated
payments (see § 1.409A–3(j)(4)). In addition, nothing in these conditions is intended to prohibit or alter the ability to provide for a subsequent deferral election under the plan that complies with the requirements of § 409A, provided that the subsequent deferral election requirements apply,
both in form and in operation, to the deferred amount based upon the plan provisions after correction under this notice.
I. Effect of Correction
If a document failure is eligible for correction under, and is fully corrected in accordance with, the requirements of this
§ III, the applicable provisions of §§ V
through XI of this notice (including any
requirement of a service recipient to report, and a service provider to include an
amount in income under § 409A(a) and
pay all applicable taxes, including an additional tax under § 409A(a)), and the reporting requirements of § XII of this notice, then, except as otherwise provided in
this notice, the service recipient will not be
required to report, and the service provider
will not be required to include any amount
as income under § 409A(a) for any taxable
year of the service provider before the taxable year in which the document failure is
properly corrected, solely as a result of the
document failure being in the written plan
during any such earlier year. For purposes
of this notice, a plan provision is fully corrected only if the plan provision, and any
substantially similar plan provision, has
been corrected in accordance with this notice with respect to all deferred amounts
under the plan to which the plan provision,
or the substantially similar plan provision,
applies (other than deferred amounts not
subject to § 409A, such as grandfathered
amounts as defined under § 1.409A–6).
This notice does not address the application of any other provision of the Code
or any other rule of law or tax doctrine,
including the constructive receipt doctrine
and the economic benefit doctrine, to a
nonqualified deferred compensation plan
due to the plan provisions either before or
as a result of the correction of a plan provision under this notice, or due to the operation of the plan either before or as a result
of the correction of a plan provision under
this notice.

January 19, 2010

J. References to the Internal Revenue
Code; Certain Terms
For purposes of this notice, references
to sections of the Code include references
to the regulations and any other applicable
guidance thereunder. For purposes of this
notice, the term “payment event” refers to
an event set forth in the applicable plan,
the occurrence of which will result in the
payment of compensation, the terms “permissible payment event” or “permissible
payment event under § 409A” refer to any
event the occurrence of which will result
in the payment of compensation that satisfies the requirements of § 409A(a) and
§ 1.409A–3(a), and the terms “impermissible payment event” or “impermissible payment event under § 409A” refer to any
event the occurrence of which will result
in the payment of compensation that does
not satisfy the requirements of § 409A(a)
and § 1.409A–3(a).
As provided by § 1.409A–1(c)(3)(viii),
the
plan
aggregation
rules
of
§ 1.409A–1(c)(2)(i) do not apply
to the written plan requirements of
§ 1.409A–1(c)(3), so that deferrals of compensation under an agreement, method,
program, or other arrangement that fails
to meet the requirements of § 409A solely
due to a failure to meet the written plan
requirements of § 1.409A–1(c)(3) are not
aggregated with deferrals of compensation under other agreements, methods,
programs, or other arrangements that
meet such requirements. Accordingly, for
purposes of this notice (other than § X and
§ XIII of this notice, and any references to
the correction of an operational failure),
the terms “arrangement”, “plan” and
“nonqualified deferred compensation
plan” refer to a plan or arrangement
subject to the requirements of § 409A(a),
without reference to the aggregation rules
of § 1.409A–1(c)(2)(i).
References in this notice to amounts
deferred under a plan in the context of
a dollar amount deferred (for example,
a requirement to include in income under § 409A(a) a specified percentage of
the amount deferred under the plan) refer
to the dollar amount determined under
applicable guidance. As of January 5,
2010, the applicable guidance for this purpose is Notice 2008–115, 2008–52 I.R.B.
1367, which also permits taxpayers to
rely upon the proposed regulations under

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§ 1.409A–4, issued on December 8, 2008
(REG–148326–05, 2008–51 I.R.B. 1325
[73 Fed. Reg. 74380]). Under this guidance, the amount deferred under a plan is
determined as of the last day of the service
provider’s taxable year. If an amount is
required to be included in income as a
condition of a document correction without regard to whether a subsequent event
occurs, the amount deferred under the plan
is determined as of the last day of the service provider’s taxable year during which
the correction is made. If an amount is
required to be included in income as a
condition of a document correction only
if an event occurs within a certain period
of time following the document correction
(generally one year), the amount deferred
under the plan is determined as of the last
day of the service provider’s taxable year
during which the event occurs.
References in this notice to the application of a corrected plan provision refer to
the change in the operation of the plan that
results from compliance with the corrected
plan provision in lieu of the pre-correction
plan provision. Nothing in this notice is
intended to imply that compliance with a
corrected plan provision is elective or that
a failure to comply with a corrected plan
provision would not otherwise be an operational failure under § 409A(a).
IV. APPLICATION OF § 409A(a)
TO CERTAIN AMBIGUOUS PLAN
TERMS
A. Terms Providing for a Payment “As
Soon as Practicable” or Substantially
Similar Language Following a Permissible
Payment Event
1. Eligibility
This section applies to a plan provision that sets forth a permissible payment
event under § 409A(a) and § 1.409A–3(a),
but requires payment “as soon as reasonably practicable” following the permissible payment event, or under conditions
substantially similar to as soon as practicable following the permissible payment
event.
2. Application of § 409A
Except as otherwise provided in this
§ IV.A, a plan provision does not fail to satisfy the requirement to designate a permis-

2010–3 I.R.B.

sible payment event under § 1.409A–3(b),
and does not otherwise result in a document failure, merely because it includes a
phrase described in § IV.A.1 of this notice.
For purposes of § 1.409A–3(d) (rules regarding the timeliness of payments), and
the application of the subsequent deferral rules and anti-acceleration rules under
§ 409A, the permissible payment event under § 409A(a) is treated as the payment
date. Thus, if the payment is not made by
the later of the end of the service provider’s
taxable year in which the permissible payment event occurs or the fifteenth day of
the third calendar month following the permissible payment event, the failure to pay
will constitute an operational failure unless
the service provider can demonstrate that
the delay qualifies for a timeliness exception under the regulations (for example, the
payment would have jeopardized the ability of the service recipient to continue as a
going concern pursuant to § 1.409A–3(d)).
The resulting operational failure may qualify for the correction of operational failures involving late payments pursuant to
Notice 2008–113 provided that all other
applicable requirements of that notice are
met. Notwithstanding the foregoing, if a
plan contains a provision otherwise eligible for this section and the service recipient has a pattern or practice of making late
payments that do not qualify for a timeliness exception under the regulations, that
plan and any other plan of the service recipient containing language similar to that
provision will be treated as having failed
to set forth a permissible payment date
(regardless of whether the other plan provides deferred compensation to any service provider that participates in the plan
otherwise eligible for this section).
B. Permissible Payment Event with no
Definition or an Ambiguous Definition
1. Eligibility
This section applies to a plan provision
that designates a payment event but does
not define the payment event or has an ambiguous definition of the payment event,
if the plan provision could reasonably be
interpreted to be compliant with § 409A,
but could also reasonably be interpreted to
include an impermissible payment event
under § 409A (or to not include events
that must be included in the definition of a

2010–3 I.R.B.

permissible payment event under § 409A).
For example, the use of the term “termination of employment” as a payment event
in a plan could be interpreted to mean only
events that constitute a separation from
service for purposes of § 1.409A–3(a)(1),
or also to include events that do not constitute a separation from service for purposes
of § 1.409A–3(a)(1) (and to exclude events
that must be included in the definition of
a separation from service). Similarly, the
use of the term “acquisition” of the service recipient as a payment event in a plan
could be interpreted to mean only events
that constitute a change in control event
under § 1.409A–3(a)(5), or also to include
events that do not constitute a change in
control event under § 1.409A–3(a)(5). If
the plan also contains a provision requiring that the term be interpreted to comply
with the requirements of § 409A (or a plan
provision with the same effect), this section does not apply because the provision
is not ambiguous and complies with the requirements of § 409A and § 1.409A–3(a).
If the particular plan provision has been
interpreted by the service recipient, on or
after January 1, 2009, such that a pattern or
practice of the application of a specific interpretation has been established that does
not satisfy the requirements of § 409A, the
plan provision will no longer be treated as
ambiguous either with respect to the plans
to which the service recipient has applied
the interpretation, or any other plan of the
service recipient with substantially similar
language (regardless of whether the plans
provide deferred compensation to the same
service provider or service providers), and
therefore will not be eligible for the relief
in this § IV.B (but see § V of this notice).
Similarly, if the particular plan provision
has been interpreted by a court with jurisdiction over the enforcement of the contract, the term will no longer be treated
as ambiguous either with respect to the
plan at issue in the decision or with respect to any other plan of the service recipient with substantially similar language
over which the same court has jurisdiction
(regardless of whether the plans provide
deferred compensation to the same service
provider or service providers). If the definition of the payment event in the plan explicitly includes events that would not constitute a permissible payment event under
§ 409A, or explicitly excludes events that
are required for the payment event to be

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treated as a permissible payment event under § 409A, this section does not apply (but
see § V of this notice).
2. Application of § 409A
Except as otherwise provided in this
§ IV.B, a payment provision eligible for
this section will not result in the plan
failing to satisfy the requirements of
§ 409A(a) and § 1.409A–3(a). If an
amount is paid pursuant to the provision
in a manner that is not compliant with the
requirements of § 409A(a) (or, pursuant
to the provision, the plan fails to make
a payment of an amount required to be
paid to comply with the requirements of
§ 409A(a)), that payment (or failure to
make a payment) may be treated as an
operational failure eligible for relief under
Notice 2008–113 despite the interpretation
of the written plan provision in a manner that does not comply with § 409A(a),
provided that the plan is amended in accordance with this section before the end of
the service provider’s taxable year during
which the operational failure is corrected
in accordance with Notice 2008–113.
Notwithstanding the foregoing, if the facts
and circumstances indicate that the service recipient has intentionally used an
ambiguous term for a payment event in a
plan, the plan and any other plan of the
service recipient with the same or substantially similar language (regardless of
whether the plans include any of the same
service providers) will not be eligible for
relief under this section. An amendment
satisfies the requirements of this section if
the amendment either: (i) adds language
requiring that the terms of the plan be
interpreted as necessary to comply with
the requirements of § 409A(a), or (ii) sets
forth explicit definitions of the terms of the
plan that comply with the requirements of
§ 409A(a) (including by cross-reference to
the relevant regulations under § 409A(a)),
provided that in either case, except as
necessary to satisfy the requirements of
§ 1.409A–3(a), the amendment may not
have the effect of either expanding the
definition to include as a payment event
any event that was not a payment event
under the plan before the amendment,
or narrowing the definition to eliminate
as a payment event any event that was a
payment event under the plan before the
amendment. For purposes of applying the

January 19, 2010

previous sentence, it is assumed that no
permissible alternative definitions were
designated under the plan (for example, a
permissible alternative definition of separation from service under § 1.409A–1(h))
other than those designations timely made
and explicitly provided in the plan before
the correcting amendment.
C. Examples
The following examples illustrate the
provisions of this § IV.
Example 1 (as soon as reasonably practicable
payment provision). Employee A is an employee of
Employer who participates in a plan that provides for
a lump sum payment “as soon as reasonably practicable” following the earliest of separation from service, death, disability or a change in control of Employer, but does not specify any other time limit for
when payment must be completed. The definitions
of the payment events under the plan satisfy the requirements of § 1.409A–3(a). A change in control
event occurs with respect to Employer on December
1, 2010, resulting in Employee A being entitled to a
lump sum payment under the plan.
Conclusion: The plan provision providing for
payment “as soon as reasonably practicable” following the payment event does not cause the plan to
fail to designate a permissible payment date under
§ 409A and § 1.409A–3(b). However, if the amount
is not actually paid to Employee A by the later of the
end of the 2010 calendar year or the fifteenth day
of the third calendar month following the change in
control event (in this case, March 15, 2011), and the
late payment does not satisfy the requirements of a
timeliness exception under the § 409A regulations,
the plan will have an operational failure with respect
to the payment to Employee A that may be eligible
for correction under Notice 2008–113.
Example 2 (ambiguous definition of payment
event). Employee B is an employee of Employer
whose employment agreement with Employer provides for payment of $100x upon Employee B’s
“termination of employment.” The employment
agreement does not define what events constitute a
“termination of employment” and does not include
a provision that the terms of the agreement must
be interpreted in a manner consistent with § 409A.
To date, employees of Employer with substantially
similar plan provisions have never reduced their
employment to part-time and have only been paid
upon an event that constitutes a complete cessation
of services to Employer with no anticipated return to
providing services to Employer. Consequently, there
is no pattern or practice of paying amounts upon
payment events that would not constitute separations
from service under § 409A or § 1.409A–3(a)(1), or
not paying amounts upon payment events that would
constitute separations from service under § 409A(a)
and § 1.409A–3(a)(1). There is no indication that
the term was intentionally left vague. On April 1,
2010, before any amendment of the employment
agreement, Employee B ceases providing services to
Employer with no anticipated return and Employer
determines that Employee B has become entitled to

January 19, 2010

the payment of $100x. Employer pays Employee B
the $100x on April 1, 2010.
Conclusion: The plan provision providing for
payment upon a “termination of employment” will
not cause the employment agreement to fail to satisfy the document requirements of § 409A(a) and
§ 1.409A–3(a) to the extent the term is not interpreted to provide for payment under circumstances
that would cause the employment agreement to
fail to satisfy the requirements of § 409A(a) and
§ 1.409A–3(a) in operation. The agreement may be
amended at any time to provide either (i) the plan
provision must be interpreted to comply with the
requirements of § 409A, or (ii) an explicit definition
of termination of employment that qualifies as a
separation from service under § 1.409A–3(a)(1),
provided that in either case the amendment may not
have the effect of either expanding the definition to
include as a payment event any event that was not a
payment event under the plan before the amendment,
or narrowing the definition to eliminate as a payment
event any event that was a payment event under the
plan before the amendment, except as necessary to
satisfy the requirements of § 1.409A–3(a)(1) (applied
as if no alternative definition of separation from service permitted under § 1.409A–1(h) was designated
under the plan other than a designation timely-made
and explicitly provided in the pre-correction plan
provision). The payment of $100x on April 1, 2010,
will not be an operational failure and will not result in the employment agreement being treated as
failing to satisfy the requirements of § 409A(a) and
§ 1.409A–3(a)(1).
Example 3 (ambiguous definition of payment
event): The same facts as in Example 2, except that
the employment agreement is between Employer
and Employee C. Employee C provided, on average,
40 hours of service to Employer over the 36-month
period ending on April 1, 2010. On April 1, 2010,
before any amendment of the agreement, Employee
C changes status from an employee to an independent contractor and is expected to provide 20 hours
of service per week to Employer, which would not
be a separation from service under § 1.409A–3(a)(1).
Employer determines that under the agreement
Employee C is not entitled to a payment of $100x
because Employee C has not had a separation of
service from Employer.
Conclusion: The plan provision providing for
payment upon “termination of employment” will
not cause the employment agreement to fail to satisfy the document requirements of § 409A(a) and
§ 1.409A–3(a) to the extent the term is not interpreted
to provide for payment under circumstances that
would cause the employment agreement to fail to satisfy the requirements of § 409A(a) and § 1.409A–3(a)
in operation. The agreement may be amended at any
time to provide either (i) that the plan provision must
be interpreted to comply with the requirements of
§ 409A, or (ii) an explicit definition of termination
of employment that qualifies as a separation from
service under § 1.409A–3(a)(1), provided that the
definition does not add a payment event that would
not have been a payment event under the pre-correction plan provision, or remove a payment event
that would have been a payment event under the
pre-correction plan provision, except as necessary to
satisfy the requirements of § 1.409A–3(a)(1) applied
as if no alternative definition of separation from ser-

281

vice permitted under § 1.409A–1(h) was designated
under the plan, other than a designation timely made
and explicitly provided in the pre-correction plan
provision.

V. CORRECTION OF
IMPERMISSIBLE DEFINITIONS
OF OTHERWISE PERMISSIBLE
PAYMENT EVENTS
A. Impermissible Definition of Separation
from Service
1. Eligibility
This section applies to a plan provision that provides for a payment upon an
event involving a change in the relationship between the service provider and the
service recipient related to the level of
services provided by the service provider
(for example, a change from full-time to
part-time employment), the capacity in
which the service provider provides the
services to the service recipient (for example, a change in status from an employee
to an independent contractor), or the recipient of the services provided by the
service provider (for example, a change
from employment by one subsidiary to
employment by another subsidiary) that
does not qualify as a separation from service under § 1.409A–3(a)(1) but is treated
as a payment event under the plan. This
section also applies to a plan provision
that fails to provide for a payment upon
an event that is a separation from service under § 1.409A–3(a)(1) (without
reference to any permissible alternative
definition of separation from service under § 1.409A–1(h) that may be designated
under a plan).
2. Correction
A plan provision eligible for this section may be corrected in accordance with
this section before the date an event occurs
that would not be a separation from service
under § 1.409A–3(a)(1) but is a payment
event under the plan, or the date an event
occurs that is a separation from service under § 1.409A–3(a)(1) but is not a payment
event under the plan. The plan may be
corrected by amending the plan to provide
for a payment event that satisfies the requirements of § 1.409A–3(a)(1), provided
that the amendment may not have the
effect of either expanding the definition

2010–3 I.R.B.

to include as a payment event any event
that was not a payment event under the
plan before the amendment, or narrowing
the definition to eliminate as a payment
event any event that was a payment event
under the plan before the amendment,
except as necessary to satisfy the requirements of § 1.409A–3(a)(1) (without
reference to any permissible alternative
definition of separation from service under § 1.409A–1(h) that may be designated
under a plan). The amendment must be
effective immediately. If, within one year
following the date of correction, an event
occurs that is not a separation from service
under § 1.409A–3(a)(1) but would have
required payment under the pre-correction plan provision, or that is a separation
from service under § 1.409A–3(a)(1) but
would not have required payment under
the pre-correction plan provision, and results in the corrected plan provision being
applied to avoid a payment that would
have been due under the pre-correction
plan provision, or to make a payment
that would not have been due under the
pre-correction plan provision, 50% of the
amount deferred under the plan to which
the pre-correction plan provision applied
must be included in income under § 409A
by the affected service provider in the service provider’s taxable year within which
the event occurs.
B. Impermissible Definition of a Change
in Control Event
1. Eligibility
This section applies to a provision of a
plan of a service recipient that provides, for
a service provider with respect to whom
that service recipient satisfies the requirements of § 1.409A–3(i)(5)(ii) (identification of relevant corporations), for a payment upon the sale of some or all of the
equity or assets of the service recipient
(other than specifically identified assets or
a specifically identified type of assets), or
a change in the effective control of the service recipient, but that includes events that
would not qualify as a change in control
event under § 1.409A–3(a)(5). For this
purpose, with respect to a parent corporation or other parent entity, a payment
event based upon the sale of an identified

subsidiary constitutes the sale of a specified asset, and accordingly employees of
the parent corporation would not be eligible for the relief provided in this section
(though employees of the subsidiary corporation may be eligible for the relief). In
addition, the requirement of a public offering of securities, securing of financing, or
similar event does not constitute a sale of
some or all of the equity or assets of a service recipient, or a change in effective control of a service recipient, for purposes of
this section.1
2. Correction
A plan provision eligible for this section may be corrected in accordance with
this section before the date an event occurs
that is not a change in control event under
§ 1.409A–3(a)(5) but is a payment event
under the plan. The plan may be corrected
by amending the plan to provide for a
change in control event that satisfies the
requirements of § 1.409A–3(a)(5), provided that the amendment may not cause
an event that was not a payment event
under the original terms of the plan to
become a payment event under the plan.
The amendment must be effective immediately. If, within one year following the
date of correction, a transaction occurs
that is not a change in control event under § 1.409A–3(a)(5) and results in the
corrected plan provision being applied to
avoid a payment that would have been due
under the pre-correction plan provision,
25% of the amount deferred under the plan
to which the pre-correction plan provision applied must be included in income
under § 409A(a) by the affected service
provider in the service provider’s taxable
year within which the event occurs.
C. Impermissible Definition of Disability
1. Eligibility
This section applies to a plan provision
that provides for a payment event related
to the service provider’s illness or other
incapacity and resulting inability to perform the service provider’s duties as a service provider to the service recipient, but
that does not qualify as disabled within
the meaning of §§ 409A(a)(2)(A)(ii) and

409A(a)(2)(C) and §§ 1.409A–3(a)(2) and
1.409A–3(i)(4).
2. Correction
A plan provision eligible for this section may be treated by the service recipient
and service provider as not failing to satisfy the requirements of § 409A(a) and
§ 1.409A–3(a)(2) before an event occurs that is not a disability within the
meaning of §§ 409A(a)(2)(A)(ii) and
409A(a)(2)(C) and § 1.409A–3(a)(2)
but is a payment event under the plan.
The plan may be corrected by amending the plan provision either to remove
the payment event or to define the payment event as a disability within the
meaning of §§ 409A(a)(2)(A)(ii) and
409A(a)(2)(C) and § 1.409A–3(a)(2). The
amendment must be effective immediately. The plan may be corrected in the
same manner after an event occurs that
is not a disability within the meaning of
§§ 409A(a)(2)(A)(ii) and 409A(a)(2)(C)
and § 1.409A–3(a)(2) but is a payment
event under the plan, but only if the entire
amount, if any, paid under the plan due
to the event would be eligible for correction under Notice 2008–113 if the plan
were treated as having had a compliant
plan provision regarding the disability
payment, and the payment is treated as an
operational failure and is corrected under
Notice 2008–113.
D. Examples
The following examples illustrate the
provisions of this § V. For each example,
assume that the employee and employer
are eligible to correct the impermissible
provision under § III of this notice at all
relevant times.
Example 1 (impermissible definition of separation from service). Employer consists of one parent
corporation and two 80%-owned subsidiaries. Employee D is an employee of the parent corporation
who participates in a plan providing for $100x when
Employee D separates from service from the parent
corporation, defined to be a separation from service
under § 1.409A–3(a)(1) except that the term also includes a transfer from employment by the parent corporation to employment by either of the subsidiaries.
On January 10, 2011, Employee D transfers from the
parent corporation to a subsidiary corporation.
Conclusion: Because the plan provision was not
corrected before Employee D transferred from the

1

However, until further guidance is issued, for purposes of identifying and correcting failures eligible for this section, taxpayers may apply the guidance provided in Section III.G of the
Preamble to the final regulations issued under § 409A regarding application of change in control events by analogy to partnerships.

2010–3 I.R.B.

282

January 19, 2010

parent corporation to a subsidiary corporation, regardless of whether Employee D is paid $100x, the
plan fails to satisfy the requirements of § 409A(a) and
§ 1.409A–3(a)(1) for 2011 and all previous years in
which the plan contained that plan provision, and Employee D must include amounts in income and pay the
additional taxes under § 409A(a) accordingly.
Example 2 (impermissible definition of separation from service). The same facts as in Example 1,
except that the plan is with Employee E, instead of
Employee D, and Employee E does not transfer employment on January 10, 2011. On March 1, 2011,
Employer amends the plan to remove a transfer from
the parent corporation to either of the subsidiaries as
a separation from service payment event under the
plan. On July 1, 2011, Employee E transfers employment from the parent corporation to one of the subsidiary corporations.
Conclusion: Employer and Employee E corrected
the provision before Employee E transferred from
the parent corporation to one of the subsidiary corporations, but Employee E transferred from the parent corporation to a subsidiary corporation within one
year following the date of correction. Provided that
Employer does not pay Employee E any amount under the plan due to the event, Employer reports 50%
of the amount deferred under the plan to which the
pre-correction plan provision applied as an amount
includible in income under § 409A(a) for 2011 on
the Form W–2, Box 1 and Box 12 using Code Z,
for Employee E, and Employee E includes 50% of
the amount deferred in income under § 409A(a) and
pays all applicable Federal taxes, including the additional 20% tax on such amount (but not the additional premium interest tax), Employee E will not be
required to include in income under § 409A(a) any
further amount solely as a result of the pre-correction
plan provision.
Example 3 (impermissible definition of separation from service). The same facts as in Example 2,
except that the plan is with Employee F, instead of
Employee E, and Employee F does not transfer employment on July 1, 2011. On May 1, 2012, Employee F transfers employment from the parent corporation to one of the subsidiary corporations.
Conclusion: Employer and Employee F corrected
the provision before Employee F transferred from the
parent corporation to one of the subsidiary corporations, and Employee F did not transfer from the parent corporation to a subsidiary corporation within one
year following the date of correction. Provided that
Employer does not pay Employee E any amount under the plan due to the event, Employee F will not
be required to include any amount in income under
§ 409A(a) solely as a result of the pre-correction plan
provision.
Example 4 (impermissible definition of a change
in control payment event). Employee G is an employee of Employer. Employee G participates in a
plan that provides for a payment of $100x to Employee G upon the earliest of Employee G attaining
age 65, death, or a “change in control” of Employer.
The definition of “change in control” under the plan
does not satisfy the definition of a change in control event under § 1.409A–3(a)(5) solely because the
definition includes an initial public offering of more
than 30% of the stock of Employer. On February 15,
2011, at which time Employee G is age 50, Employer

January 19, 2010

amends the definition of change in control under the
plan to delete the occurrence of an initial public offering of Employer stock as a “change in control” of
Employer and does not add any other change in control events that would cause a payment under the plan,
regardless of whether the additional event is permissible under § 1.409A–3(a)(5). Employer has an initial
public offering of 33% of Employer stock on July 1,
2011.
Conclusion: Employer and Employee G corrected the provision before the initial public offering,
but the initial public offering occurred within one
year following the date of correction. Provided that
Employer does not pay Employee G any amount under the plan due to the event, Employer reports 25%
of the amount deferred under the plan to which the
pre-correction plan provision applied as an amount
includible in income under § 409A(a) for 2011 on
the Form W–2, Box 1 and Box 12 using Code Z, for
Employee G, and Employee G includes 25% of the
amount deferred in income under § 409A(a) and pays
all applicable Federal taxes, including the additional
20% tax on such amount (but not the additional premium interest tax), Employee G will not be required
to include in income under § 409A(a) any further
amount solely as a result of the pre-correction plan
provision.
Example 5 (impermissible definition of a disability provision). Employee H is an employee of
Employer who participates in a plan that provides
for payments of $100x to Employee H upon the
earlier of Employee H’s separation from service (as
defined under § 1.409A–1(h)), death or disability.
The definition of disability requires only that the
employee be unable to continue for a period of six
months his or her duties in the employee’s position
of employment at the time of the disability. On
July 1, 2011, Employee H suffers an illness that
qualifies as a disability under the plan but does not
qualify as a disability under § 1.409A–3(a)(2). On
July 15, 2011, Employee H receives a payment of
$100x. On August 1, 2011, the plan is amended so
that the definition of disability under the plan would
qualify as a disability under § 1.409A–3(a)(2). On
September 15, 2011, Employer and Employee H
treat the $100x as an operational failure under Notice
2008–113 and Employee H repays Employer the
$100x and meets all the other requirements of Notice
2008–113.
Conclusion: Because the plan provision defining
disability was corrected and all payments received
under the plan due to the impermissible payment
event were treated as operational failures and
corrected under Notice 2008–113, Employer and
Employee H are not required to treat the plan as
failing to satisfy the requirements of § 409A(a) and
§ 1.409A–3(a)(2) solely due to the plan provision
defining disability.
Example 6 (impermissible definition of a disability provision). The same facts as in Example 6, except
that the plan is between Employer and Employee J,
and on July 1, 2011, Employee J does not suffer an
illness but instead is injured in a manner that qualifies as a disability under the plan and as a disability
under § 1.409A–3(a)(2).
Conclusion: Because the injury to Employee J
qualifies as both a payment event under the plan and a
disability under § 1.409A–3(a)(2), Employee J must

283

be paid $100x. A failure to pay the $100x would be an
operational failure that may be eligible for correction
under Notice 2008–113.

VI. CORRECTION OF
IMPERMISSIBLE PAYMENT
PERIODS FOLLOWING A
PERMISSIBLE PAYMENT EVENT
A. Payment Periods of Longer than 90
Days Following a Permissible Payment
Event
1. Eligibility
This section applies to a plan provision
that provides that payment will be made
following a permissible payment event under § 409A, but designates the period immediately following such payment event
during which payment may be made or
commenced as later than 90 days and earlier than 366 days following such payment
event.
2. Correction
A plan provision eligible for this section
may be corrected by amending the plan
to either remove the period following the
permissible payment event during which
payment may be made or commenced, or
to set forth a period immediately following
the permissible payment event that complies with § 409A(a) and § 1.409A–3(b)
(so that it is a period not exceeding 90 days
and the service provider does not have a
right to designate the taxable year of payment). If the plan is not so amended before
the occurrence of the permissible payment
event with respect to any service provider,
but is so amended within a reasonable
time thereafter, the plan may be treated as
not failing to comply with § 409A(a) and
§ 1.409A–3(b) (so that the amount is paid
within 90 days of the payment event and
the service provider does not have a right
to designate the taxable year of payment)
for the affected service provider solely
due to the impermissible payment periods,
provided that upon the occurrence of the
permissible payment event the plan complies in operation with § 1.409A–3(b) with
respect to the affected service provider,
and 50% of the amount deferred under
the plan to which the pre-correction plan
provision applied is included in income
under § 409A(a) by the affected service

2010–3 I.R.B.

provider in the service provider’s taxable
year within which the permissible payment event occurs.
B. Payment Periods Following a
Permissible Payment Event Dependent
Upon the Service Provider Completing
Certain Employment-Related Actions
1. Eligibility
This section applies to a plan provision
that provides for payment upon a permissible payment event under § 409A, but conditions the payment on an employment-related action of the service provider such
as the execution and submission of a noncompetition agreement, a nonsolicitation
agreement, or a release of claims.
2. Correction
A plan provision eligible for this section may be corrected in accordance with
this section before the date an event occurs that would be a permissible payment
event under § 409A to which the provision applies. The plan may be corrected
by amending the plan to remove the ability of the service provider to delay or accelerate the timing of the payment as a result
of the service provider’s actions; provided,
however, that if the plan provides for payment (subject to the service provider’s action) within a designated period following the permissible payment event under
§ 409A that complies with § 1.409A–3(b),
the amendment must provide for payment
only on the last day of such designated period, and if the plan does not provide for
payment (subject to the service provider’s
action) within a designated period following the permissible payment event under
§ 409A that complies with § 1.409A–3(b),
the amendment must provide for payment
only upon a fixed date either 60 or 90 days
following the occurrence of the permissible payment event. The amendment may
not otherwise change the time or form of
payment.
C. Examples
The following examples illustrate the
provisions of this § VI. For each example,
assume that the employee and employer
are eligible to correct the impermissible
provision under § III of this notice at all
relevant times.

2010–3 I.R.B.

Example 1 (Payment Period in Excess of 90 Days
Following Permissible Payment Event). Employee
K is an employee of Employer whose employment
agreement entitles Employee K to $100x upon a
separation from service (defined to comply with
§ 1.409A–1(h)), payable within 180 days following
the separation from service and the exact timing
within the 180 days is in the discretion of Employer.
On February 1, 2011, Employee K has a separation from service from Employer. Employer pays
Employee K $100x on March 1, 2011, provides
Employee K no election regarding the timing of the
payment and amends the employment agreement
to comply with § 1.409A–3(b) within a reasonable
period of time following February 1, 2011.
Conclusion: Employer paid Employee K $100x
within 90 days following Employee K’s separation
from service, Employer provided Employee K no
election regarding the timing of the payment and
Employer amended the employment agreement to
comply with § 1.409A–3(b) within a reasonable
period of time following Employee K’s separation
from service. Provided that Employer reports 50%
of the amount deferred under the plan to which the
pre-correction plan provision applied as an amount
includible in income under § 409A(a) for 2011 on
the Form W–2, Box 1 and Box 12 using Code Z, for
Employee K, and Employee K includes the amount
in income under § 409A(a) and pays all applicable
Federal taxes, including the additional 20% tax on
such amount (but not the additional premium interest
tax), Employee K will not be required to include in
income under § 409A(a) any further amount solely
as a result of the plan provision providing a 180-day
payment period.
Example 2 (impermissible payment period following a permissible payment event). The same
facts as in Example 1, except that the agreement is
between Employer and Employee L, and Employee
L does not separate from service on March 1, 2011.
On March 15, 2011, Employer amends Employee
L’s employment agreement to provide for payment
within 90 days of Employee L’s separation from
service with the exact timing within the 90 days at
the discretion of the employer. On April 1, 2011,
Employee L has a separation from service from
Employer and Employer pays Employee L $100x on
April 15, 2011, without providing Employee L any
election regarding the timing of the payment.
Conclusion: Because Employer corrected Employee L’s employment agreement before Employee
L’s separation from service, Employee L will not
be required to include any amount in income under
§ 409A(a) solely as a result of the 180-day payment
period under the pre-correction plan provision.
Example 3 (impermissible payment provision
making timing of payment after a permissible payment event dependent upon service provider action).
Employee M is an employee of Employer whose
employment agreement entitles Employee M to
$100x upon a separation from service (defined to
comply with § 1.409A–1(h)). Employee M’s employment agreement provides that the amount is
payable within 90 days of Employee M’s separation
from service, but not until Employee M executes and
submits a release of claims and any period during
which Employee M may revoke the release pursuant
to applicable law has expired before the end of the
90-day period. If Employee M fails to execute the

284

release the amount is forfeited. On April 1, 2011,
Employer and Employee M amend Employee M’s
employment agreement to provide for payment of
th
the amount on the 90 day following Employee M’s
separation from service provided that Employee M
has executed and submitted a release of claims and
the statutory period during which Employee M is
entitled to revoke the release of claims has expired
th
on or before that 90 day. Employee M has a separation from service with Employer on June 1, 2011
and Employee M executes and submits a release of
claims on June 30, 2011. Employer pays Employee
$100x on August 30, 2011.
Conclusion: Because Employer and Employee M
corrected the amendment before Employee M’s separation from service, and because Employer paid the
amount in compliance with the amended plan provision, Employee M is not required to include any
amount in income under § 409A solely due to the
pre-correction plan provision.
Example 4 (payment provision making timing of
payment after a permissible payment event dependent upon service provider action). Employee N is
an employee of Employer whose employment agreement entitles Employee N to $100x upon a separation
from service (defined to comply with § 1.409A–1(h)).
Employee N’s employment agreement provides that
the amount is payable upon Employee N executing
and submitting a release of claims and after any period during which Employee N may revoke the release pursuant to applicable law has expired, but the
agreement does not include any time limit for payment. On April 1, 2011, Employer and Employee N
amend Employee N’s employment agreement to proth
vide for payment of $100x on the 60 day following Employee N’s separation from service, provided
that Employee N has executed and submitted a release of claims and the statutory period during which
Employee N is entitled to revoke the release of claims
th
has expired on or before that 60 day. Employee N
has a separation from service with Employer on June
16, 2011. Employee N executes and submits a release
of claims on July 1, 2011. Employer pays Employee
N $100x on August 15, 2011.
Conclusion: Because Employer and Employee N
corrected the provision before Employee N’s separation from service, Employee N is not required to include any amount in income under § 409A(a) solely
due to the pre-correction plan provision.

VII. CORRECTION OF CERTAIN
IMPERMISSIBLE PAYMENT
EVENTS AND PAYMENT
SCHEDULES
A. Plans with Permissible and
Impermissible Payment Events under
§ 409A
1. Eligibility
This section applies to a plan provision
that, with respect to a deferred amount,
provides both for one or more permissible
payment events under § 409A, and one or
more impermissible payment events under

January 19, 2010

§ 409A. This section does not apply to a
payment event the occurrence of which is
in the discretion of the service recipient,
such as the right of the service recipient
to use its discretion to pay some or all of
an amount upon a different payment event
(for example, service recipient discretion
to terminate and liquidate the plan), or the
service provider, such as the right of the
service provider to an accelerated payment
upon an agreement to forfeit a portion of
the amount deferred (a haircut provision).

missible payment events. The amendment
must be effective immediately, and if any
of the impermissible payment events that
would have required payment under the
pre-correction plan provision occur within
one year following the date of correction,
50% of the amount deferred under the plan
to which the pre-correction plan provision
applied must be included in income under
§ 409A(a) by the affected service provider
for the service provider’s taxable year
within which the event occurs.

2. Correction

B. Plans with Only Impermissible
Payment Events under § 409A

With respect to a service provider, a
plan provision eligible for this section may
be corrected in accordance with this section before the date a payment event that
is impermissible under § 409A has been
elected as a payment event by the service
provider participating in the plan or otherwise applies to an amount deferred by
the service provider. The plan may be corrected by amending the plan to remove
such impermissible payment event. For
this purpose, an impermissible payment
event will not be treated as elected until the
service provider’s election is irrevocable
under the terms of the plan. (Note that although this relief is available for a service
provider who has not elected an impermissible payment event even though other service providers under a substantially similar
plan have elected an impermissible payment event, eligibility for any correction
under this notice for the service providers
who have elected an impermissible payment event generally requires that the service recipient take commercially reasonable steps to identify and correct all substantially similar language in other plans
sponsored by the service recipient, including with respect to those who have not
elected an impermissible payment event.
See § III.B of this notice).
With respect to a service provider, to
the extent one or more impermissible
payment events under a plan provision eligible for this section has been elected by
the service provider, or otherwise has become applicable to the service provider’s
deferred amount, a plan provision eligible
for this section may be corrected in accordance with this section before the date
any of the impermissible payment events
occurs. The plan may be corrected by
amending the plan to remove such imper-

January 19, 2010

1. Eligibility
This section applies to a plan provision
that, with respect to a deferred amount,
provides for payment only upon one or
more impermissible payment events under
§ 409A and does not include any permissible payment events under § 409A.
2. Correction
A plan provision eligible for this section may be corrected in accordance with
this section before the date one or more
of the impermissible payment events occurs to which the provision applies. The
plan may be corrected by amending the
plan to remove the provision providing for
the impermissible payment events before
any impermissible payment event occurs,
and replacing that provision with a provision providing for payment upon the later
of the service provider’s separation from
service (as defined under § 1.409A–1(h)
without reference to any permissible alternative definition that may be designated in
the plan) and the sixth anniversary of the
date of correction. In addition, the affected
service provider must include 50% of the
amount deferred under the plan to which
the pre-correction plan provision applied
in income under § 409A(a) in the service
provider’s taxable year within which the
date of correction occurs.
C. Certain Impermissible Alternative
Payment Schedules
1. Eligibility
This section applies to a plan provision
that, with respect to a deferred amount,
provides for more than one time or form

285

of payment upon the occurrence of a single type of permissible payment event under § 409A in a manner that fails to satisfy the requirements of § 409A(a) and
§ 1.409A–3(c).
2. Correction
To the extent the multiple times or
forms of payment relate to the occurrence
of a service provider’s voluntary and involuntary separation from service (as defined
under § 1.409A–1(n)), a plan provision
eligible for this section may be corrected
in accordance with this section before the
date a separation from service occurs that
could result in the impermissible multiple
times or forms of payment for that service provider. The plan may be corrected
by amending the plan to provide that the
time or form of payment upon a voluntary
separation from service will be the same
time or form of payment that the pre-correction plan provision provided for upon
an involuntary separation from service (as
defined under § 1.409A–1(n)), subject to
the requirements of § 409A(a)(2)(B)(i), if
applicable (the six-month delay requirement). The amendment must be effective
immediately, and if a service provider has
a voluntary separation from service within
one year following the date of correction
which results in the corrected plan provision being applied to avoid a time or
form of payment that would have been due
under the pre-correction plan provision,
50% of the amount deferred under the plan
to which the pre-correction plan provision applied must be included in income
under § 409A(a) by the affected service
provider in the service provider’s taxable
year within which the event occurs.
To the extent the multiple times or
forms of payment result from an alternative payment schedule relating to
some factor other than whether a service
provider’s separation from service is voluntary or involuntary, a plan provision
eligible for this section may be corrected
in accordance with this section before the
date a payment event occurs that could result in the impermissible multiple times or
forms of payment for that service provider.
Until that time, the plan may be corrected
by amending the plan to remove the times
or forms of payment, in accordance with
the next sentence, until the remaining
times or forms of payment no longer cause

2010–3 I.R.B.

the plan to fail to satisfy the requirements
§ 409A and § 1.409A–3(c). In determining
which of two times or forms of payment
should be removed, the remaining time or
form of payment must be the time or form
of payment resulting in, or potentially resulting in, the latest final payment date,
and if two times or forms of payment result
in, or potentially result in, the same latest
final payment date, the time or form of
payment commencing, or potentially commencing, at the latest possible date, and if
those two dates are the same, the time or
form of payment generally anticipated to
result in the amount deferred being paid
at later dates. The amendment must be
effective immediately, and if a payment
event corrected under this provision occurs within one year following the date of
correction, 50% of the amount deferred
under the plan to which the pre-correction
plan provision applied must be included
in income under § 409A(a) by the affected
service provider in the service provider’s
taxable year within which the event occurs. If a time or form of payment has
no possibility of applying to a service
provider because the service provider is
not eligible and can never become eligible,
or is no longer eligible and cannot again
become eligible, for such a time or form of
payment, that time or form of payment is
not required to be removed from the plan
with respect to that service provider and
the service recipient and service provider
may treat the plan as not failing to satisfy the requirements of § 409A(a) and
§ 1.409A–3(c) with respect to that service
provider merely because of the inclusion
of that time or form of payment in the plan.
D. Impermissible Service Provider or
Service Recipient Discretion with Respect
to a Payment Schedule Following a
Permissible Payment Event (Including
Subsequent Deferral Elections)
1. Eligibility
This section applies to a plan provision
that provides a service provider or a service recipient with discretion to change the
time or form of payment of an amount
due under the plan following a permissible payment event, causing the plan to fail
to satisfy the requirements of § 409A(a),
§ 1.409A–2(b) or § 1.409A–3(j). However, this section does not apply to a plan

2010–3 I.R.B.

provision that provides a service provider
or service recipient discretion to change or
modify payment events, such as the discretion to terminate the plan.
2. Correction
A plan provision to which this section applies that provides a default time
or form of payment that would be in
effect if the service provider or service
recipient did not exercise its discretion to
change the time or form of payment, and
that does not provide any discretion to
change the time or form of payment after
the payment event has occurred, will not
be treated as failing to meet the requirements of § 409A(a) and § 1.409A–3(a),
§ 1.409A–3(j) or § 1.409A–2(b) if the
service provider and service recipient do
not exercise their discretion, or revoke
any discretion exercised and the revocation occurs more than one year before the
payment event occurs. However, if a service provider to the same service recipient
participates in a plan with a substantially
similar provision, and either the service
provider or service recipient exercises its
discretion under the plan to change the
time or form of payment under the plan
and does not revoke that exercise of discretion at least one year before the payment
event occurs, then, to be eligible to correct
that plan provision under this section the
service recipient is required to take commercially reasonable steps to identify and
correct all substantially similar provisions
in other plans, including substantially similar provisions with respect to which the
discretion has not been exercised by the
service provider or service recipient or
whose exercises of that discretion have
been revoked.
In all other cases, a plan provision eligible for this section may be corrected in accordance with this section before the date a
payment event occurs that is the subject of
the plan provision eligible for this section.
The plan may be corrected by amending
the plan in accordance with this section.
To the extent that the plan has a default time or form of payment that would
be in effect if the service provider or service recipient did not exercise its discretion to change the time or form of payment, the plan may be amended to remove
the service provider’s or service recipient’s
discretion to change the time or form of

286

payment. If the plan does not have a default time or form of payment that would
be in effect if the service provider or service recipient did not exercise its discretion to change the time or form of payment, the plan may be amended to remove the service provider’s or service recipient’s discretion to change the time or
form of payment, and to provide that the
time or form of payment will be that potential time or form of payment under the
terms of the plan in place immediately
prior to the amendment that would result
in the latest final payment date, and if two
forms of payment result in, or potentially
result in, the same latest final payment
date, the form of payment commencing, or
potentially commencing, at the latest possible date, and if those two dates are the
same the form of payment generally resulting in the amount deferred being paid
at later dates. In each case the amendment must be effective immediately. If
a payment event to which the correction
applies occurs within one year following
the date of correction (including where a
service provider or service recipient had
exercised its discretion before the correction and had revoked the discretion within
one year of the occurrence of the payment
event), 50% of the amount deferred under
the plan to which the pre-correction plan
provision applied must be included in income under § 409A(a) by the affected service provider in the service provider’s taxable year within which the event occurs.
E. Impermissible Service Recipient
Discretion to Accelerate Payment Events
1. Eligibility
This section applies to a plan provision that does not comply with
§ 1.409A–3(j)(4) that provides a service
recipient with the discretion to accelerate
and make a payment regardless of whether
a payment event has occurred, such as the
discretion to terminate the plan and immediately pay all amounts deferred, and
thus does not comply with § 409A(a) and
§ 1.409A–3(a) or § 1.409A–3(j).
2. Correction
With respect to a service provider, a
plan provision eligible for this section may
be corrected in accordance with this section before the earlier of the date the ser-

January 19, 2010

vice recipient exercises its discretion to accelerate a payment under the plan and such
discretion is irrevocable, or the date a payment has been made under the plan pursuant to the exercise of discretion. The
plan may be corrected by amending the
plan to remove the service recipient’s discretion to accelerate the payment or to otherwise make the acceleration permissible
under § 1.409A–3(j)(4).
F. Impermissible Reimbursement or
In-Kind Benefit Provisions
1. Eligibility
This section applies to a plan provision that provides for a reimbursement or
in-kind benefits subject to § 409A that
does not comply with the requirements of
§ 409A(a) and § 1.409A–3(i)(1)(iv).

would have made the service provider
eligible for payment of reimbursement or
in-kind benefits under the pre-correction
plan provision within one year following
the date of correction and results in the
corrected plan provision being applied to
avoid or reduce the availability or payment
of reimbursement or in-kind benefits, 50%
of the amount deferred under the plan to
which the pre-correction plan provision
applied must be included in income under
§ 409A in the service provider’s taxable
year within which the event occurs.
G. Examples

2. Correction

The following examples illustrate the
provisions of this § VII. For each example,
assume that the employee and employer
are eligible to correct the impermissible
provision under § III of this notice at all
relevant times.

A plan provision eligible for this section may be corrected in accordance
with this section before the date an event
occurs that would result in the service
provider becoming eligible to receive a
reimbursement or in-kind benefits subject
to § 409A. The plan may be corrected
by amending the plan to provide for reimbursement or in-kind benefits that satisfy the requirements of § 409A(a) and
§ 1.409A–3(i)(1)(iv), provided that any
amendment required to satisfy the requirements of § 1.409A–3(i)(1)(iv)(A)(3) must
cause the amount eligible for reimbursement or in-kind benefits to be allocated pro
rata to the number of years during which
the service provider may be eligible to
receive the reimbursement or in-kind benefits (which may not be amended as part of
the plan correction). If the pre-correction
reimbursement or in-kind benefits were
available for the service provider’s or other
individual’s lifetime, the period for purposes of the proration requirement must
be established based upon that service
provider’s or individual’s life expectancy
under reasonable actuarial assumptions.
If the pre-correction reimbursement or
in-kind benefits were available for a period
ending with an event, the period for purposes of the proration requirement must
be established based upon reasonable assumptions and may not be less than three
years. The amendment must be effective
immediately, and if an event occurs that

Example 1 (plan with permissible and impermissible payment events). Employee P is an employee
of Employer whose employment agreement entitles
Employee P to $100x payable upon the earlier of separation from service or an initial public offering of
Employer stock. On January 1, 2011, Employer and
Employee P amend the employment agreement to remove the payment event related to an initial public offering, so that the amount is payable solely upon Employee P’s separation from service. An initial public
offering of Employer stock occurs on September 1,
2011.
Conclusion: Employer and Employee P corrected
the employment agreement before the initial public
offering of Employer stock, but the initial public offering occurred within one year following the date
of correction. Provided that Employer reports 50%
of the amount deferred under the plan to which the
pre-correction plan provision applied as an amount
includible in income under § 409A(a) for 2011 on
the Form W–2, Box 1 and Box 12 using Code Z, for
Employee P, and Employee P includes 50% of the
amount deferred in income under § 409A and pays
all applicable Federal taxes, including the additional
20% tax on such amount (but not the premium interest
tax), Employee P will not be required to include any
further amounts in income under § 409A(a) solely as
a result of the pre-correction plan provision.
Example 2 (plan with permissible and impermissible payment events). Employee Q is an employee
of Employer whose employment agreement entitles
Employee Q to $100x payable upon the earlier of
separation from service or an initial public offering
of Employer stock. On July 1, 2011, Employer and
Employee Q amend the employment agreement to remove the payment event related to an initial public offering, so that the amount is payable solely upon Employee Q’s separation from service. An initial public
offering of Employer stock occurs on September 1,
2012.
Conclusion: Employer and Employee Q corrected the employment agreement more than one year
before the initial public offering of Employer stock.

January 19, 2010

287

Provided that Employer does not pay Employee Q
any amount pursuant to this plan provision due to
the initial public offering, Employee Q will not be
required to include any amount under § 409A(a)
solely as a result of the pre-correction plan provision.
Example 3 (plan with only impermissible payment events). Employee R is an employee of Employer who participates in a plan providing for payment of $100x to a service provider upon the service
provider’s child enrolling in an institution providing
post-secondary education. On August 15, 2011, Employee R’s child enrolls in an institution providing
post-secondary education.
Conclusion: Because Employee R’s child enrolled in an institution providing post-secondary
education before the provision was corrected, regardless of whether Employee R is paid $100x, the plan
is not eligible for correction, and Employee R must
include amounts in income and pay the additional
taxes under § 409A(a) accordingly.
Example 4 (plan with only impermissible payment
events). Employee S is an employee of Employer
who participates in a plan providing for payment
of $100x to a service provider upon the service
provider’s child enrolling in an institution providing
post-secondary education. On October 1, 2011,
Employer and Employee S amend the plan to replace the provision providing for payment upon a
service provider’s child enrolling in an institution
providing post-secondary education with a provision
providing for payment upon the later of the service
provider’s separation from service (as defined under
§ 1.409A–1(h) without reference to any permissible
alternative definition that may be designated in a
plan) and October 1, 2017.
Conclusion: Employer and Employee S corrected
the plan provision before a child of Employee S enrolled in an institution providing post-secondary education. Provided that Employer reports 50% of the
amount deferred under the plan to which the pre-correction plan provision applied as an amount includible in income under § 409A(a) for 2011 on the Form
W–2, Box 1 and Box 12 using Code Z, for Employee
S, and Employee S includes 50% of the amount deferred in income under § 409A(a) and pays all applicable Federal taxes, including the additional 20% tax
on such amount (but not the additional premium interest tax), Employee S will not be required to include
any further amount in income under § 409A(a) solely
due to the pre-correction plan provision.
Example 5 (plan with impermissible alternative
payment schedules). Employee T is an employee of
Employer whose employment agreement with Employer provides for payment of $100x in the form
of a lump sum payment if Employee T has an involuntary separation from service with Employer, and
$100x in the form of ten annual installments if Employee T has a voluntary separation from service with
Employer. On October 1, 2011, Employer amends
the agreement to replace the provision providing for
payment in the form of installments upon a voluntary separation from service with a provision providing for payment in the form of a lump sum upon a
voluntary separation from service. Employee T has a
voluntary separation from service with Employer on
June 1, 2015.
Conclusion: Because Employee T and Employer
corrected the plan provision before Employee T separated from service with Employer, and Employee

2010–3 I.R.B.

T separated from service more than one year following the date of correction, Employee T will not
be required to include any amount in income under
§ 409A(a) solely due to the pre-correction plan provision.
Example 6 (plan with impermissible alternative
payment schedules). All of Employer’s employees
are classified as either Level 1 or Level 2 employees, depending upon the position in which they work
and the division at which they work. Employee U is
an employee of Employer whose employment agreement with Employer provides for a payment of $100x
in the form of a lump sum if Employee U separates
from service at a time that Employee U is a Level
1 employee, or for payment of $100x in the form of
ten annual installments if Employee U separates from
service at a time that Employee U is a Level 2 employee. On October 1, 2011, Employer amends the
agreement to replace the provision providing for payment in the form of a lump sum payment upon a separation from service at the time Employee U is a Level
1 employee with a provision providing for payment
in the form of ten annual installments upon Employee
U’s separation from service (regardless of Employee
U’s classification at the time). Employee U has a separation from service with Employer on June 1, 2012
at which time Employee U is a Level 2 employee.
Conclusion: Employer and Employee U corrected the plan provision before Employee U separated from service, and Employee U separated from
service within a year of the correction. Provided that
Employer pays $100x to Employee U in ten annual
installments, Employer reports 50% of the amount
deferred under the plan to which the pre-correction
plan provision applied as an amount includible in
income under § 409A(a) for 2012 on the Form W–2,
Box 1 and Box 12 using Code Z, for Employee U,
and Employee U pays all applicable Federal taxes,
including the additional 20% tax on such amount (but
not the additional premium interest tax), Employee
U will not be required to include any further amount
in income under § 409A(a) solely as a result of the
pre-correction plan provision.
Example 7 (plan with impermissible service
provider or service recipient discretion with respect
to payment schedules following permissible payment
events). Employee V is an employee of Employer
who participates in a plan providing for payment of
$100x to Employee V upon Employee V attaining
age 65 in the form of ten annual installments, unless
Employer otherwise determines in its sole discretion to pay the amount in the form of a lump sum
payment. On February 1, 2011, Employer amends
the plan with Employee V to remove Employer’s
discretion to change the time or form of payment, so
that the amount is payable in the form of ten annual
installments. Employee V attains age 65 on July 1,
2012.
Conclusion: Because Employer and Employee V
corrected the provision before Employee V attained
age 65, and because more than one year passed after
the date of correction before Employee V attained age
65, Employee V will not be required to include an
amount in income under § 409A(a) solely due to the
pre-correction plan provision.
Example 8 (plan with impermissible service
provider or service recipient discretion with respect
to payment schedules following permissible payment
events). Employee W is an employee of Employer

2010–3 I.R.B.

who participates in a plan providing for payment of
$100x to Employee W upon Employee W attaining
age 65 in the form of a lump sum payment or annual
installments not to exceed ten years, determined at
the sole discretion of Employer. On February 1,
2011, Employer amends the plan with Employee W
to remove Employer’s discretion to change the time
or form of payment upon Employee W attaining age
65, so that the amount is payable in the form of ten
annual installments upon Employee W attaining age
65. Employee W attains age 65 on January 2, 2012.
Conclusion: Employer and Employee W corrected the plan provision before Employee W attained
age 65, but less than one year before Employee W
attained age 65. Provided that Employer reports 50%
of the amount deferred under the plan to which the
pre-correction plan provision applied as an amount
includible in income under § 409A(a) for 2012 on
the Form W–2, Box 1 and Box 12 using Code Z,
for Employee W, and Employee W includes 50%
of the amount deferred in income under § 409A(a)
and pays all applicable Federal taxes, including the
additional 20% tax on such amount (but not the
additional premium interest tax), Employee W will
not be required to include any further amount in
income under § 409A(a) solely as a result of the
pre-correction plan provision.
Example 9 (plan with impermissible service
provider or service recipient discretion with respect
to payment schedules following permissible payment
events). Employee X is an employee of Employer
who participates in a plan providing for payment of
$100x to Employee X upon Employee X’s separation
from service, provided that Employer may delay
that payment for up to three years if certain cash
flow targets are not met. On July 1, 2011, Employer
amends the plan to remove its discretion to delay
payment, and to remove any delay on payment due
to a failure to meet prescribed cash flow targets. It
replaces those provisions with a provision stating
that payment will be delayed to the extent a payment
would jeopardize the ability of the service recipient
to continue as a going concern, but only until such
time as the making of the payment would not have
such effect. Employee X separates from service on
January 1, 2013.
Conclusion: Because Employer and Employee X
corrected the plan provision more than one year before Employee X separated from service, Employee
X will not be required to include an amount in income
under § 409A(a) solely as a result of the pre-correction plan provision. Note that this correction required
not only the removal of the discretion, but also the
provision that payment would be delayed if certain
cash flow targets were not met. The addition of the
language providing for a delay if the payment would
jeopardize the ability of the service recipient to continue as a going concern is not required as a condition of the correction, but may be added because the
provision complies with the operational provisions of
§ 1.409A–3(d) (permitting delayed payments under
certain circumstances, regardless of whether such circumstances are described in the plan).
Example 10 (plan permitting impermissible subsequent deferral election).
Employee Y is an employee of Employer who
participates in a plan providing for payment at age 65.
The plan further provides that an employee may elect
at any time before 30 days before reaching age 65 to

288

defer the payment for a period of at least 12 months.
Employee Y never makes a subsequent deferral election under the plan, attains age 65 on March 1, 2011,
and is paid the amount deferred under the plan.
Conclusion: Because Employee Y was only allowed to apply Employee Y’s discretion to further defer the payment before the payment event occurred,
and has never applied the subsequent deferral election
provision, Employee Y will not be required to include
an amount in income under § 409A(a) solely due to
the impermissible subsequent deferral plan provision.
Example 11 (plan permitting impermissible subsequent deferral election). The same facts as in Example 10, except that the participant is Employee Z
who makes a subsequent deferral election to defer the
payment to age 70 on June 1, 2011, when Employee
Z is age 63. On July 1, 2011, Employee Z revokes the
subsequent deferral election.
Conclusion: Because Employee Z was only allowed to apply Employee Z’s discretion to further defer the time or form of payment before the payment
event occurred, and revoked the subsequent deferral election more than one year before the payment
event occurred (attaining age 65), Employee Z will
not be required to include an amount in income under
§ 409A solely due to the pre-correction plan provision.
Example 12 (plan permitting impermissible subsequent deferral election). The same facts as in Example 10, except that the participant is Employee AA
who makes a subsequent deferral election to defer
the payment to age 67 on March 1, 2010, when Employee AA is age 63 and two months. Employee AA
revokes the subsequent deferral election on September 1, 2011, when Employee AA is age 64 and eight
months. Employee AA attains age 65 on January 1,
2012, and is not paid the amount deferred under the
plan.
Conclusion: Because Employee AA exercised
Employee AA’s discretion to make a subsequent
deferral election under the plan, but did not revoke
the subsequent deferral election more than one year
before the payment event occurred (Employee AA
attaining age 65), and the plan provision was not
corrected before Employee AA attained age 65, Employee AA must include the amount deferred under
the plan in income under § 409A(a).
Example 13 (plan permitting impermissible subsequent deferral election). The same facts as in Example 10, except that the participant is Employee BB
who makes a subsequent deferral election to defer the
payment to age 68 on March 1, 2010, when Employee
BB is age 63 and six months. On June 1, 2011, when
Employee BB is age 64 and eight months, the plan is
amended to remove the subsequent deferral election
provision and Employee BB’s election is revoked.
Conclusion: Employee BB exercised Employee
BB’s discretion to make a subsequent deferral election under the plan and did not revoke the subsequent deferral election more than one year before the
payment event occurred (Employee BB attaining age
65), but the plan provision was corrected before Employee BB attained age 65. Provided that Employer
reports 50% of the amount deferred under the plan
to which the pre-correction plan provision applied as
an amount includible in income under § 409A(a) for
2011 on the Form W–2, Box 1 and Box 12 using Code
Z, for Employee BB, and Employee BB includes 50%
of the amount deferred in income under § 409A(a)

January 19, 2010

and pays all applicable Federal taxes, including the
additional 20% tax on such amount (but not the additional premium interest tax), Employee BB will not
be required to include any further amount in income
under § 409A(a) solely as a result of the pre-correction plan provision.
Example 14 (plan with impermissible service recipient discretion to accelerate payment events). Employee CC is an employee of Employer who participates in a plan that provides for payment of $100x to
Employee CC upon Employee CC’s separation from
service, unless Employer otherwise elects in its sole
discretion to pay all or a portion of such amount on
an earlier date. On January 1, 2011, Employer exercises its discretion to accelerate payment to Employee CC and makes a $50x lump sum payment on
March 1, 2011. On July 1, 2011, Employer amends
the plan to remove its discretion to pay all or a portion of the remaining amount on an earlier date, and
to provide only that it may exercise discretion to terminate and pay amounts under the plan in compliance
with 1.409A–3(j).
Conclusion: Because Employer exercised its discretion and made a payment before the correction of
the plan provision, regardless of whether Employee
CC returns the payment the plan fails to meet the requirements of § 409A(a) for periods during which
the plan contained the provision, and Employee CC
must include amounts in income and pay the additional taxes under § 409A(a) accordingly.
Example 15 (plan with impermissible service recipient discretion to accelerate payment events). Employee DD is an employee of Employer who participates in a plan that provides for payment of $100x to
Employee DD upon Employee DD’s separation from
service, unless Employer otherwise elects in its sole
discretion to pay all or a portion of such amount on
an earlier date. On March 1, 2011, Employer amends
the plan to remove its discretion to pay all or a portion of such amount on an earlier date, and to provide only that it may exercise discretion to terminate
and pay amounts under the plan in compliance with
1.409A–3(j). Employee DD has a separation from
service on March 15, 2011.
Conclusion: Because Employer and Employee
DD corrected the plan provision before Employer
exercised its discretion, Employee DD will not be
required to include any amount in income under
§ 409A(a) solely as a result of the pre-correction plan
provision.
Example 16 (plan with impermissible reimbursement or in-kind benefits provision). Employee EE
is an employee of Employer who participates in
a plan providing that Employee EE is eligible for
reimbursement of country club dues for five years,
up to an aggregate of $100x, following Employee
EE’s separation from service with Employer after
attaining age 65 and ten years of service. Employee
EE attained age 65 and ten years of service during
2009. On April 1, 2011, Employer amends the plan
to specify that Employee EE is only eligible for
reimbursement of up to $20x during each of the five
years following the Employee EE’s separation from
service. Employee EE has a separation from service
with Employer on December 15, 2011.
Conclusion: Employer and Employee EE corrected the plan provision before Employee EE separated from service with Employer but less than one
year passed between the date of correction and Em-

January 19, 2010

ployee EE’s separation from service. Provided that
Employer reports 50% of the amount deferred under the plan to which the pre-correction plan provision applied as an amount includible in income under
§ 409A(a) for 2011 on the Form W–2, Box 1 and Box
12 using Code Z, for Employee EE, and Employee EE
includes 50% of the amount deferred in income under
§ 409A(a) and pays all applicable Federal taxes, including the additional 20% tax on such amount (but
not the additional premium interest tax), Employee
EE will not be required to include any further amount
in income under § 409A(a) solely as a result of the
pre-correction plan provision.
Example 17 (plan with impermissible reimbursement or in-kind benefits provision). The same facts as
in Example 16, except that the plan is with Employee
FF and Employee FF has a separation from service
with Employer on October 1, 2012.
Conclusion: Because Employer and Employee
FF corrected the plan provision before Employee FF
separated from service with Employer, and because
more than one year passed between the date of correction and Employee FF’s separation from service, Employee FF will not be required to include any amount
in income under § 409A(a) solely as a result of the
pre-correction plan provision.

VIII. CORRECTION OF FAILURE
TO INCLUDE SIX-MONTH DELAY
OF PAYMENT FOR SPECIFIED
EMPLOYEES
1. Eligibility
This section applies to a plan that fails
to include a provision providing for a
six-month delay of payment for a specified employee, to the extent required by
§ 409A(a)(2)(B)(i) and § 1.409A–1(c)(3).
2. Correction
A plan eligible for this section may
be corrected in accordance with this section before the date an event occurs that
would be subject to the requirements of
§ 409A(a)(2)(B)(i) by amending the plan
to add the requirements set forth under
§ 409A(a)(2)(B)(i) and to further provide that an amount payable under the
plan that is subject to the requirements
of § 409A(a)(2)(B)(i) may not be paid
before the later of (i) 18 months following the date of correction, or (ii) six
months following the date of the payment
event. The amendment must be effective
immediately. Provided that the requirements of this section are otherwise met,
the correction will not constitute a subsequent change in the time or form of
payment under § 1.409A–2(b). If a service
provider subject to the requirements of
§ 409A(a)(2)(B)(i) participates in the plan

289

that is so amended and has a separation
from service within one year following
the date of correction that results in the
corrected plan provision being applied to
avoid a payment that would have been due
under the pre-correction plan provision,
50% of the amount deferred under the plan
to which the pre-correction plan provision
applied (and that thus is delayed due to the
amendment) must be included in income
under § 409A(a) by the service provider in
the service provider’s taxable year within
which the separation from service occurs.
3. Example
Employee GG is the chief executive officer of
Employer, a corporation whose stock is publicly
traded. Employee GG participates in a plan providing for a payment of $100x in ten annual installments
of $10x commencing immediately when Employee
GG separates from service from Employer but the
plan does not include the six-month delay in payment
as required by § 409A(a)(2)(B)(i). On September 1,
2011, Employer and Employee GG amend the plan
to include the requirements under § 409A(a)(2)(B)(i)
and to provide further that no amount will be payable
before March 1, 2013 (18 months after September 1,
2011). Employee GG has a separation from service
with Employer on December 1, 2011.
Conclusion: Employer and Employee GG corrected the plan provision before Employee GG separated from service, but Employee GG has a separation from service within one year following the
date of correction, which results in a payment being delayed that would have been due under the precorrection plan provision. Provided that Employer
does not pay Employee GG any amount under the
plan until March 1, 2013 (except, as provided by
the plan due to death, disability (as defined under
§ 1.409A–3(i)(4)) or a permissible acceleration under
§ 1.409A–3(j)(4)), Employer reports as an amount includible in income under § 409A(a) for 2011 on the
Form W–2, Box 1 and Box 12 using Code Z, for Employee GG 50% of the amount deferred under the plan
to which the pre-correction plan provision applied,
and Employee GG includes 50% of the amount deferred in income under § 409A(a) and pays all applicable Federal taxes, including the additional 20% tax
on such amount (but not the additional premium interest tax), Employee GG will not be required to include
any further amount in income under § 409A solely as
a result of the pre-correction plan provision.

IX. CORRECTION OF PROVISIONS
PROVIDING FOR IMPERMISSIBLE
INITIAL DEFERRAL ELECTIONS
1. Eligibility
This section applies to a plan provision
that provides for an initial election to defer
compensation that does not comply with
§ 409A(a) and § 1.409A–2(a). Notwithstanding the foregoing, this section does

2010–3 I.R.B.

not apply to any plan provision that is eligible for correction under § VII.D of this
notice. Accordingly, this section generally
applies to plan provisions providing elections to defer compensation that would not
otherwise be deferred compensation, and
not elections as to the time or form of payment of a deferred amount.
2. Correction
A service provider is not required
to include an amount in income under
§ 409A(a) solely because a plan includes
a provision that provides for an initial election to defer compensation that
does not comply with § 409A(a) and
§ 1.409A–2(a), if the provision has not
been applied by the service provider or
the service recipient with respect to the
service provider. If the service provider
or service recipient takes the action necessary to make an election under the
provision before the applicable deadline
under § 1.409A–2(a), the provision will
be treated as applied on the date of such
applicable deadline unless the service
provider or service recipient has revoked
the election before the applicable deadline under the regulations. If the service
provider or service recipient takes the action necessary to make an election under
the provision after the applicable deadline
under § 1.409A–2(a), the provision will be
treated as applied on the date the necessary
action is taken. Note that if a substantially similar provision under a plan has
been applied by another service provider
to the same service recipient, or by the
same service recipient with respect to another service provider, to be eligible for
correction the service recipient would be
required to take commercially reasonable
steps to identify and correct the provisions
in all such plans. See § III.B of this notice.
A plan provision that is eligible for
correction under this section that has been
applied may be corrected in accordance
with this section provided that the correction is made no later than the end of
the service provider’s second taxable year
immediately following the taxable year
during which occurs the applicable deadline for making an initial deferral election
under § 409A(a) and § 1.409A–2(a). The
plan may be corrected by amending the
plan to remove the ability to make the
impermissible initial deferral election,

2010–3 I.R.B.

provided that any amounts that were not
paid during one or more of the service
provider’s taxable years due to the impermissible initial deferral election are
corrected in accordance with the provisions of Notice 2008–113 (including
any income inclusion under § 409A(a)
required by the applicable provision of
Notice 2008–113). Notwithstanding § III
of this notice, this correction will not have
any retroactive effect on amounts deferred
under the same provision in any previous
year if the deferral was not corrected under
this section for such previous year by the
applicable deadline under this section, so
that the plan provision will remain a plan
document failure for the previous year
and any resulting deferral will remain an
operational failure.
3. Examples
Example 1 (plan permitting impermissible initial
deferral election). Employee HH is an employee
of Employer who participates in an annual bonus
plan under which employees are awarded bonuses
based on a calendar year of service, payable on
March 15 of the following year. The bonus plan is
not a performance-based compensation arrangement
under § 1.409A–2(a)(8). The bonus plan provides
that employees may make initial deferral elections
to defer the bonus until separation from service (as
defined under § 1.409A–1(h)), provided that the
election is made no later than June 30 of the year
in which the bonus is earned. Employee HH is not
a new participant in the plan so that the applicable
deadline under 1.409A–2(a) for the deferral of the
bonus earned during 2012 (the 2012 annual bonus)
is December 31, 2011. On November 1, 2011,
Employee HH submits an election form electing to
defer the 2012 annual bonus. On December 31, 2011,
Employee HH revokes the deferral election for the
2012 annual bonus.
Conclusion: Because Employee HH revoked the
impermissible deferral election on or before the applicable deadline for a permissible deferral election
under §1.409A–2(a), the plan provision permitting
the impermissible initial deferral election has not
been applied. Accordingly, Employee HH will not
be required to include any amount in income under
§ 409A(a) for the 2012 annual bonus solely due to
the plan provision.
Example 2 (plan permitting impermissible initial
deferral election). The same facts as in Example 1,
except that the participant is Employee JJ who also
makes an election to defer the 2012 annual bonus on
November 1, 2011, but does not revoke her deferral election for the 2012 annual bonus on or before
December 31, 2011. On May 15, 2012, the deferral election provision is removed from the plan and
Employee JJ’s deferral election for the 2012 annual
bonus is revoked.
Conclusion: Because Employee JJ did not revoke the impermissible deferral election until after
the deadline for making an initial deferral election un-

290

der § 1.409A–2(a), the provision has been applied.
Because Employee JJ took the actions necessary to
make the election on or before the applicable deadline under § 1.409A–2(a) for making an initial deferral election, the provision is treated as applied on
the date of the deadline, December 31, 2011. Because the provision was removed from the plan before December 31, 2013, and because no amount had
failed to be paid due to the application of the impermissible deferral election, no operational failure occurred, and Employee JJ will not be required to include an amount in income under § 409A(a). Note
that to be eligible to make this correction, Employer
would be required to take commercially reasonable
steps to identify and remove any substantially similar provision in any plan of the Employer, including
plans of other service providers and including plans
under which the plan provision permitting an impermissible initial deferral election had not been applied.
Note further that the correction of the provision with
respect to the 2012 annual bonus will have no effect
on the impermissible deferral of an annual bonus or
other amounts earned in 2011 or any earlier year, so
that, for example, if a 2011 annual bonus were earned
by Employee JJ and Employee JJ made an impermissible deferral election with respect to the 2011 bonus
that was not corrected in accordance with this section,
that amount would be subject to income inclusion and
the additional taxes under § 409A(a) for the taxable
year 2011 (the year in which Employee JJ’s right to
the bonus was first no longer subject to a substantial
risk of forfeiture), regardless of whether Employee
JJ’s deferral election with respect to the 2011 annual
bonus was subsequently revoked and Employee JJ
was paid the bonus on or before March 15, 2012.
Example 3 (plan permitting impermissible initial
deferral election). Employee KK is an employee of
Employer who has been an employee of Employer
for several years. Employee KK has been eligible for,
but has not participated in, a plan under which an employee may elect to defer all or part of his salary to
be payable at separation from service (as defined in
§ 1.409A–1(h)), provided that the election may only
be applied to salary earned on or after the first day
of the second month immediately subsequent to the
date the employee makes an election to defer. For
example, under the plan terms an election made in
April may only apply to salary earned for June 1 or
later. On April 15, 2011, Employee KK makes an
election to defer 10% of any salary earned on or after
June 1, 2011. The deferral election remains in effect
through December 1, 2012, at which time Employer
removes the provision from the plan and revokes Employee KK’s election. Employer treats the failures
to pay Employee KK 10% of Employee KK’s salary
earned from June 1, 2011, through December 1, 2012,
as operational failures under Notice 2008–113 and
corrects the failures during 2012 (treating the salary
that would have been paid during 2011 as a correction
made during the taxable year after the taxable year of
the operational failure, and the salary that would have
been paid during 2012 as a correction made during
the taxable year in which the operational failure occurred).
Conclusion: Because Employee KK took the
actions necessary to make a deferral election under
the plan provision before the applicable deadline for
making an initial deferral election under 1.409A–2(a)
(in this case, December 31, 2010), the provision is

January 19, 2010

treated as applied on the date the actions were taken
(April 15, 2011). Because Employer removed the
plan provision on or before December 31, 2012, and
revoked Employee KK’s election and corrected the
resulting operational failures under Notice 2008–113,
Employee KK will not be required to include an
amount in income under § 409A(a) solely as a result
of the pre-correction plan provision. However, Employee KK may still be required to include an amount
in income under § 409A(a) as a condition of correction under Notice 2008–113. Note that to be eligible
to make this correction, Employer would be required
to take commercially reasonable steps to identify and
remove any substantially similar provision in any
plan of Employer, including plans of other service
providers and including plans under which the plan
provision permitting an impermissible initial deferral
election had not been applied.

X. AMENDMENT PERIOD
FOLLOWING A SERVICE
RECIPIENT’S INITIAL ADOPTION
OF A PLAN
1. Eligibility and Correction
This section applies to a plan provision that is eligible for correction under
any other section of this notice, but only
to the extent that the document failure is
corrected no later than the later of the end
of the calendar year in which, or the 15th
day of the third calendar month following, the date the first legally binding right
to deferred compensation arose under that
plan and all other plans of the service recipient that would be treated as the same
plan under § 1.409A–1(c)(2) if a single
service provider participated in all of such
plans (for example, all nonaccount balance
plans of the service recipient). For purposes of determining whether a service recipient has an additional plan to the one
under which the legally binding right has
first arisen, a taxpayer may disregard any
plan not subject to § 409A (for example, a grandfathered plan as defined under
§ 1.409A–6) and any plan under which all
amounts have been paid or forfeited such
that the service recipient did not retain any
obligation to make a payment under that
plan at the time the legally binding right
arises under the plan at issue. Provided
that the plan is corrected in accordance
with the applicable section of this notice by
such deadline (including the requirement
that all commercially reasonable steps to
identify and correct any other plans with
substantially similar language is met), any
amounts paid that would not have been
paid under the corrected plan provision if

January 19, 2010

that provision had always been the plan
provision are treated as operational failures and corrected under Notice 2008–113
by the end of the calendar year in which
the document failure is corrected (and any
amounts not paid that would have been
paid under the corrected plan provision if
that provision had always been the plan
provision are treated as operational failures and corrected under Notice 2008–113
by the end of the calendar year in which
the document failure is corrected), the applicable section of this notice may be applied without applying any requirement in
that section that an amount be includible in
income under § 409A(a) if an event occurs
within one year following the date of correction.
2. Example
On April 1, 2011, Employer establishes its first
nonqualified deferred compensation plan that is a
nonaccount balance plan. Employee LL, an employee of Employer, becomes eligible for a payment
under the plan of $100x by Employer upon the earlier
of an initial public offering of Employer stock or
separation from service. On September 15, 2011,
Employer and Employee LL amend the plan in accordance with § VII.A of this notice to delete the
payment event related to an initial public offering
of Employer stock, so that the plan provides that
the amount will only be paid upon Employee LL’s
separation from service. Because the amendment
occurred by the end of the calendar year in which the
first legally binding right arose under any nonaccount
balance plan of Employer, Employer and Employee
LL may apply the provisions of § VII.A of this notice
without applying any requirements that Employee
LL include an amount in income if certain events occur within one year following the date of correction.
Accordingly, Employee LL will not be required to
include any amount in income under § 409A(a) as a
result of the pre-correction plan provision regarding
payment upon an initial public offering even if there
is a public offering of Employer stock on or before
December 15, 2012 (provided that if there had been
an initial public offering of Employer stock before
September 15, 2011, and Employee LL had been
paid an amount under the plan, the payment would
be required to be treated as an operational failure and
corrected under Notice 2008–113 by December 31,
2012).

XI. TRANSITION RELIEF
A. Correction of Document Failures
Described in this Notice
1. Relief for Corrections Made on or
Before December 31, 2010
Solely for purposes of applying this notice, if a plan fails to satisfy the require-

291

ments of § 409A(a) in a manner that is
eligible for correction under this notice,
and the plan is corrected in accordance
with this notice on or before December 31,
2010, the plan may be treated as having
been corrected on January 1, 2009, for purposes of applying the relief provided under the applicable section of this notice,
and any requirement of an income inclusion under § 409A as a condition of the
relief will not apply (for example, an income inclusion under § 409A due to an
event occurring within one year following the date of correction), provided that
any payment made before December 31,
2010 that would not have been made under
the amended provision (or any payment
not made before December 31, 2010 that
would have been made under the amended
provision) is treated as an operational failure and corrected under Notice 2008–113
on or before December 31, 2010. Nothing in this section is intended to modify the
requirements of Notice 2008–113, so that,
for example, a service provider that was
an insider with respect to a service recipient may be required to include an amount
in income under § 409A to satisfy the requirements of Notice 2008–113 and be eligible for relief under this section. See Notice 2008–113, § VII.
2. Examples
The following examples illustrate the
provisions of this § XI.A. For each example, assume that the employee and employer are eligible to correct the impermissible provision under § III of this notice.
Example 1. Employee MM is an employee of
Employer who participates in a plan that provides for
a payment of $100x upon a separation from service
that was defined to include transition from employee
to independent contractor status and to exclude any
reduction in the hours of employment. In all other
respects, the plan complies with § 409A(a). On July
1, 2009, Employee MM became an independent contractor and was paid $100x. On April 1, 2010, Employer amends the plan in accordance with § V.A of
this notice to define separation from service as a separation from service in accordance with § 1.409A–1(h)
(designating no permissible alternative definition of
separation from service under § 1.409A–1(h)).
Conclusion: Because Employer and Employee
MM amended the plan before December 31, 2010
in accordance with § V.A of this notice, if the payment of $100x is treated as an operational failure and
corrected in accordance with the provisions of Notice
2008–113 on or before December 31, 2010, the plan
may be treated as corrected under § V.A without application of the requirement of income inclusion under § 409A if an event occurs that would have been

2010–3 I.R.B.

treated as a separation from service under the pre-correction provision but not under the corrected plan provision (or an event occurs that would not have been
treated as a separation from service under the pre-correction plan provision but would be so treated under
the corrected plan provision) within one year following the date of correction.
Example 2. Same facts as Example 1, except that
the plan is with Employee NN, who reduced her hours
from 40 hours per week to 10 hours per week on
September 1, 2009 and was not paid any amount.
Conclusion: Because Employer and Employee
NN amended the plan between Employer and Employee NN before December 31, 2010, in accordance
with § V.A of this notice, if the failure to pay $100x
during 2009 is treated as an operational failure and
corrected in accordance with the provisions of Notice 2008–113 on or before December 31, 2010, the
plan may be treated as corrected under § V.A without
application of the requirement of an income inclusion
under § 409A if an event occurs that would have been
treated as a separation from service under the pre-correction provision but not under the corrected plan provision (or an event occurs that would not have been
treated as a separation from service under the pre-correction provision but would be so treated under the
corrected plan provision) within one year following
the date of correction.
Example 3. The same facts as in Example 1, except that the plan is with Employee PP who continues
providing services of 40 hours per week for Employer
at all relevant times and received no payment.
Conclusion: For purposes of this notice the plan
may be treated as corrected under § V.A without application of the requirement of an income inclusion
under § 409A if an event occurs that would have been
treated as a separation from service under the pre-correction provision but not under the corrected plan provision (or an event occurs that would not have been
treated as a separation from service under the pre-correction provision but would be so treated under the
corrected plan provision) within one year following
the date of correction.

B. Correction of Impermissible
Provisions Linking Nonqualified Deferred
Compensation Plans
1. Relief for Corrections Made on or
Before December 31, 2011
This section applies to a nonqualified
deferred compensation plan if the amount
deferred under the plan is determined by,
or the time or form of payment is affected
by, the amount deferred under, or the payment provisions of, another nonqualified
deferred compensation plan such that one
or both of the plans fails to satisfy the requirements of § 409A(a). Provided that
the plans are corrected in accordance with
this section on or before December 31,
2011, the plans will not be treated as failing
to satisfy the requirements of § 409A(a)
solely due to the effect of the linkage be-

2010–3 I.R.B.

tween the two plans (so that one or both
plans may continue to fail to satisfy the
requirements of § 409A(a) due to a failure unrelated to the linkage between the
two plans, in which case that failure would
need to be addressed separately if eligible
for correction under this notice). To correct under this section, the time or form of
payment under the two plans must be made
identical. For this purpose, any permissible payment event under § 409A that is a
payment event under either plan must be
retained. If the two plans contain the same
permissible payment events under § 409A,
but the payment events are defined differently, the amended payment event for
the two plans must be the narrower definition (meaning the definition resulting
in the smaller scope of events that would
constitute payment events). If the two
plans contain the same permissible payment event under § 409A, but the schedule
of payments following the payment event
are different, the amended schedule of payments must be the payment schedule resulting in, or potentially resulting in, the
latest final payment date, and if two payment schedules result in, or potentially result in, the same latest final payment date,
the payment schedule commencing, or potentially commencing, at the latest possible date, and if those two dates are the
same the payment schedule generally resulting in the amount deferred being paid
at later dates. If any amounts have been
paid under one or more of the plans in
a manner that would not have been consistent with the amended payment provisions had those payment provisions been
the payment provisions since January 1,
2009, or have failed to be paid in a manner
that would not have been consistent with
the amended payment provisions, the payments must be treated as operational failures and corrected under Notice 2008–113
on or before December 31, 2011 to be eligible for the relief under this section.
2. Example
Employee QQ is an employee of Employer. Employee QQ participates in a nonqualified deferred
compensation plan that is a nonaccount balance plan
providing for ten annual installments beginning at
the earlier of separation from service or a change in
control of Employer, with a change in control of Employer defined to include only a sale of the majority
of the stock of Employer. The amount payable under
the nonaccount balance plan is offset by the amount
deferred under a nonelective account balance plan

292

providing for a lump sum payment at the earliest of
death, disability, unforeseeable emergency, change in
control of Employer (defined to include all permissible change in control events under §1.409A–3(i)(5))
or separation from service. The plan fails to meet the
requirement of designating a permissible payment
event under § 1.409A–3(a)(1) due to the linkage between the plans because, for example, a contribution
to the nonelective account balance plan would reduce
the deferred amount under the nonaccount balance
plan, causing an amount previously deferred under
the nonaccount balance plan to become payable at
the different times and forms of payment applicable
under the nonelective account balance plan. The
plans are amended on or before December 31, 2011,
so that both plans provide payment upon the earliest
of a change of control of Employer (defined to include only a sale of the majority of the stock of the
employer), a separation from service, death, disability or unforeseeable emergency, and provide that a
payment upon a change of control of Employer or a
separation from service will be made in ten annual
installments beginning on the date of the payment
event, and that a payment upon death, disability or
unforeseeable emergency will be made as a lump
sum payment on the date of the payment event.
Conclusion: Provided that any payments that
were made before the amendment of the plan that
would not have been made if the amended provision had been the payment provision under the plan
on and after January 1, 2009, or any failures to
make payments that would have been due before
the amendment of the plan if the amended provision
had been the payment provision under the plan on
and after January 1, 2009, are treated as operational
failures and corrected under Notice 2008–113 on
or before December 31, 2011, Employee QQ and
Employer may treat the two plans as not failing to
satisfy the requirements of § 409A(a) solely due to
the effect of the linkage of the two plans on the time
or form of payment of deferred amounts under the
plans.

C. Correction of Payment Schedules
Determined by the Timing of Payments
Received by the Service Recipient
1. Relief for Corrections Made on or
Before December 31, 2011
If a nonqualified deferred compensation plan contains a payment provision that would satisfy the requirement
for a fixed schedule of payments under
§1.409A–3(i)(1)(iii) but for a failure to
satisfy either one or both of the conditions set forth in §1.409A–3(i)(1)(iii)(C)
or (D), the payment provision will not be
treated as causing the plan to fail to be
a fixed schedule of payments if the plan
is amended to satisfy such conditions on
or before December 31, 2011, and any
payments made under the plan that would
not have been made if the amended provision had been the payment provision

January 19, 2010

under the plan since January 1, 2009, or
any failures to make payments that would
have been due before the amendment of
the plan if the amended provision had always been the payment provision under
the plan, are treated as operational failures
and corrected under Notice 2008–113 on
or before December 31, 2011.
2. Example
Employee RR is an employee of Employer who
participates in a nonqualified deferred compensation plan under which Employee RR is entitled to
a payment of 20% of the amounts collected on any
outstanding accounts receivable for which Employee
RR was the primary contact at the time of Employee
RR’s separation from service, to the extent such
amounts are collected on or before the third anniversary of Employee RR’s separation from service. The
accounts receivable arise from bona fide and routine transactions in the ordinary course of business
of Employer. Employee RR does not at any time
have effective control of Employer, of any customer
from whom the accounts receivable are due, or of
the collection of any of the accounts receivable.
Employee RR separated from service on March 1,
2008. On February 1, 2009, Employee RR received
a payment of 20% of the amount collected on the
identified accounts receivable through December 31,
2008. The plan satisfies all of the requirements of
§ 1.409A–3(i)(1)(iii) except § 1.409A–3(i)(1)(iii)(D),
the requirement that the payment schedule provide
an objective nondiscretionary schedule under which
the payments will be made to the service provider.
On October 1, 2009, Employee RR and Employer
amend the agreement to provide that each January 15
Employer will pay Employee RR an amount equal
to 20% of the amounts collected on the identified
accounts receivable during the previous calendar
year. Because the payment to Employee RR on
February 1, 2009, would not have failed to satisfy
the operational requirements of § 409A(a) had
the amended payment provision been the payment
provision of the plan since January 1, 2009, the
payment is not required to be treated as an operational
failure and corrected under Notice 2008–113.
Employee RR and Employer may treat the plan as
not failing to have a fixed schedule of payments for
purposes of § 409A(a) for all periods prior to the
amendment.

D. Service Recipients Under Examination
for Returns Covering Periods Beginning
on or Before December 31, 2011
Solely for purposes of applying § III.C
of this notice, for corrections made on
or before December 31, 2011, a non-individual service recipient that is under
examination for periods beginning on or
before December 31, 2011, will only be
treated as under examination with respect
to any specific document failure that has
been identified as an issue in the exam-

January 19, 2010

ination (including any other plan of the
service recipient with a substantially similar document failure). Therefore, for any
document failure that has not yet been
specifically identified, the requirements
that the non-individual service recipient
not be under examination with respect to
the plan will be treated as satisfied and the
document failure may be eligible for correction under the applicable section of this
notice provided that all other eligibility
requirements are met. For this purpose, a
document failure will be treated as specifically identified in an examination of a
federal tax return for a taxable year beginning before January 1, 2009, 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.
XII. INFORMATION AND
REPORTING REQUIREMENTS
A. Information and Reporting Required
for Correction of a Document Failure
A service recipient described in any
of §§ V through XI of this notice must
attach to its timely-filed (including extensions) original federal income tax return
for its taxable year in which it corrects
the failure, a statement entitled Ҥ 409A
Document Correction under § [INSERT
APPROPRIATE SECTION(S)] of Notice
2010–6” setting out the information required by § XII.B of this notice. This
statement must also be attached to the
service recipient’s timely-filed (including
extensions) original federal income tax return for the service recipient’s taxable year
subsequent to the taxable year in which
the failure was corrected, but only to the
extent that a service provider is required to
include an amount in income during such
subsequent year to be eligible for the relief
under this notice. In addition, not later
than the date (with extensions) on which
it is required to provide an information
return (Form W–2 or 1099) to a service
provider who is affected by such failure
(or if no information return is required for
such service provider, not later than the
January 31 following the calendar year
in which it corrects such failure) for the
calendar year in which it corrects such
failure, and for the subsequent calendar

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year to the extent the service provider is
required to include an amount in income
during such subsequent year to be eligible
for relief under this notice, a service recipient described in any of §§ V through XI of
this notice must provide to each such service provider a statement entitled Ҥ 409A
Document Correction under § [INSERT
APPROPRIATE SECTION(S)] of Notice
2010–6” setting out the information required by § XII.C of this notice. A service
provider who is relying on the relief provided in §§ V through XI of this notice for
a failure to comply with § 409A(a) must attach to the service provider’s timely-filed
(including extensions) original federal
income tax return for the year in which
such failure was corrected the information
required by § XII.D of this notice. This
information must also be attached to the
service provider’s timely-filed (including
extensions) original federal income tax
return for the year subsequent to the year
in which the failure was corrected, but
only if the service provider is required to
include an amount in income during that
year to be eligible for the relief in this notice. In addition, each taxpayer relying on
the relief provided in any of §§ V through
XI of this notice must make reasonable
efforts to provide notice to the examining
agent upon the commencement of an examination of such taxpayer’s federal tax
return that the taxpayer was relying upon
the relief provided under this notice for
years covered by the examination. For
purposes of this section, a section of this
notice refers to each separate section of
this notice, such that § VI.A and § VI.B
are separate sections, and includes any use
of the transition relief in § XI.
B. Attachment to Service Recipient Tax
Return for Failures Described in §§ V
through XI of this Notice
The service recipient must attach a
statement to its return setting out the
following information for each failure described in any of §§ V through XI of this
notice:
(1) The name and taxpayer identification number of each service provider
affected by the document failure. If the
same or a substantially similar document
failure has occurred for multiple service
providers, the information required in
§§ XII.B.(2) and (3) of this notice may be

2010–3 I.R.B.

supplied only once for each such document
failure, provided that the identification of
each service provider affected by the document failure references such information.
(2) Identification of the nonqualified
deferred compensation plan with respect to
which such failure occurred.
(3) A statement that the document failure is eligible for the correction under the
terms of this notice and identifying the section of this notice under which the document failure is corrected, that the service
recipient has taken all actions required and
otherwise met all requirements for such
correction as of the last day of the service
recipient’s taxable year in which the correction is made, and also as of the last day
of any subsequent taxable year of the service recipient during which an amount is
required to be included in income under
§ 409A by a service provider as part of the
correction, and providing the date of correction and the date of any event causing
the inclusion of an amount in income under
§ 409A by the affected service provider.
(4) For each failure described in §§ V
through XI of this notice, the amount involved in each document failure, and to
the extent applicable, the amount reported
by the service recipient as includible in income under § 409A(a) as part of the correction and the percentage of the amount
involved in each document failure required
to be included in income under § 409A(a)
as part of the correction.
C. Information to be Provided to Service
Provider for Failures Described in §§ V
through XI of this Notice
The service recipient must provide
the following information to each service
provider affected by a failure to comply
with § 409A who is entitled to relief under
§§ V through XI of this notice with respect
to such failure:
(1) A statement that the service provider
is entitled to the relief provided in §§ V
through XI of this notice (identifying the
applicable section of this notice under
which the document failure is corrected)
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
corrected and also to the extent applicable, any subsequent taxable year in which

2010–3 I.R.B.

an amount is included in income under
§ 409A by the service provider as part of
the correction.
(2) The information described in
§ XII.B.(1) through (4) of this notice, but
only to the extent that the information relates to a deferred amount of that service
provider.
D. Attachment to Service Provider Tax
Return for Failures Described in §§ V
through XI of this Notice
The service provider must attach to the
service provider’s income tax return a copy
of the statement the service provider received from the service recipient with respect to each such failure. If a service
provider has included an amount in income
to be eligible for relief under this notice,
and that inclusion in income occurs in a
year subsequent to the year the plan was
corrected, the service provider must include the statement with the return for the
year of the correction as well as the return
for the year of income inclusion.
XIII. MODIFICATIONS TO NOTICE
2008–113 AND NOTICE 2008–115
A. The following sections are added as
§§ III.K and III.L of Notice 2008–113:
“K. Required Repayments by the Service
Provider
If to qualify for any applicable relief a
service provider is required to repay to the
service recipient an amount erroneously
paid or made available to the service
provider, such as required in §§ IV.A,
IV.B, V.B, V.C, VII.B and VII.C, the
amount erroneously paid or made available to the service provider refers to the
gross amount paid to, or on behalf of, the
service provider, before the application
of any withholding requirements such as
the Federal employment tax withholding
requirements. The service provider may
satisfy the requirement to repay the service
recipient the amount erroneously paid to
the service provider and interest (if applicable) by paying the service recipient
the equivalent amount on or before the
applicable deadline. The service provider
will only be required to pay the service
recipient the net amount received after
any withholding to the extent the service
recipient has made a tax correction (e.g.,

294

an adjustment made on Form 941–X, Adjusted Employer’s QUARTERLY Federal
Tax Return or Claim for Refund) to recover the amount of taxes withheld on the
amount erroneously paid. For purposes of
this notice, a correction made by the service recipient to recover Federal or state
taxes withheld on the amount erroneously
paid shall be considered repayment by the
service provider of an amount equal to
the amount of taxes for which a tax correction is made by the service recipient.
Alternatively, in lieu of repayment, the
service recipient may reduce the service
provider’s compensation that otherwise
would have been paid on or before the applicable deadline by an equivalent amount.
To the extent that, in lieu of repayment,
the service recipient reduces other compensation that would have been paid to the
service provider, the other compensation
that would have been paid to the service
provider, but instead is used to repay the
erroneous payment or interest (if applicable), is includible in income (and wages if
the service provider is an employee).
The amount will not be treated as repaid by the service provider if, in connection with such payment, the service recipient pays the service provider, or otherwise
provides a benefit (including the provision
of a loan to the service provider or an obligation to pay an amount or provide a benefit in the future), intended as a substitute
for all or part of the amount the service
provider is required to repay the service recipient.
L. Determination of Amount Erroneously
Paid or Amount Erroneously Deferred
and the Date an Amount was Otherwise
Payable
Generally if an amount has been erroneously paid to a service provider, the
amount must be repaid by the service
provider to the service recipient to qualify for the relief. For this purpose, if the
amount erroneously paid to the service
provider was paid in the form of property (such as stock), the amount that must
be repaid equals the fair market value of
the property at the time of the erroneous
payment. Any difference between the fair
market value of the property at the time of
the erroneous payment and the fair market
value of the property at the time of the
repayment is treated as earnings or losses

January 19, 2010

in accordance with the applicable section
of this notice. If the amount erroneously
paid to the service provider was paid in
the form of property (such as stock), upon
repayment of that amount, earnings and
losses may be credited by otherwise adjusting the amount of property due to the
service provider under the terms of the
plan. For example, a service recipient erroneously distributes to a service provider
100 shares of stock worth $5 per share
on the date of distribution and the distribution fails to satisfy the requirements of
§ 409A because the shares are not payable
under the terms of the plan until a future
date. At the time of the correction under
the terms of the applicable section of Notice 2008–113 (as modified), the service
recipient’s stock is worth $10 per share.
To satisfy the repayment requirement, the
service provider must pay the service recipient $500 (the amount of shares equal
to the fair market value of the shares on
the date of the erroneous payment) which
may be accomplished through the return
of 50 shares. If the applicable section of
this notice does not allow for the crediting
of earnings, or the service recipient does
not otherwise credit earnings, one method
by which the service recipient may adjust
for the earnings is by reducing the number
of shares due to the service provider under
the terms of the plan to 50 shares.
Generally if an amount has been erroneously deferred on behalf of a service
provider, the service recipient must pay the
amount erroneously deferred to the service
provider to qualify for the relief. If the
amount of the erroneous deferral was set
as a dollar amount, the amount of the erroneous deferral equals the dollar amount regardless of whether the erroneous deferral
was invested in, or subsequently denominated as, an amount of property (such as a
number of shares of stock). If the amount
of the erroneous deferral was based on certain property (for example, a certain number of shares of stock), the amount of the
erroneous deferral equals the fair market
value of the property at the time it would
otherwise have been payable to the service provider had the erroneous deferral
not occurred. For this purpose, the date
the amount of the erroneous deferral is
payable to the service provider is the first
date under the plan during the taxable year
that the amount became payable under the

January 19, 2010

plan (disregarding any ability to pay up to
30 days early under §1.409A–3(d)).”
B. The following section replaces section
V.D.2(a) of Notice 2008–113:
“(a) A failure is described in this
§ V.D.2(a) if, under the terms of a plan
and an applicable deferral election, and
§ 409A, an amount that should not have
been deferred compensation under the
plan is erroneously credited to the service
provider’s account or otherwise treated
as deferred compensation under the plan,
and such excess amount otherwise would
have been paid to the service provider
during the service provider’s taxable year
in which the excess amount was incorrectly credited to the service provider’s
account or otherwise treated as deferred
compensation under the plan. A failure
is also described in this § V.D.2(a) if, under the terms of a plan and an applicable
deferral election, and § 409A, an amount
that should have been paid under the plan
is not paid to the service provider during
the taxable year in which falls the payment date (as determined under § III.K of
this notice), and the failure to make such
payment results in an operational failure
under § 409A(a).”
C. Modification of Notice 2008–115
For service recipients and service
providers who are entitled to relief under
this notice, Notice 2008–115, 2008–52
I.R.B. 1367 (relating to reporting and
wage withholding for 2008 and subsequent years), is modified to conform to
the provisions of this notice (including
the modifications to Notice 2008–113
contained in § XIII.A and B of this notice) with respect to (i) the amount that
is required to be included in income by a
service provider under § 409A(a), and (ii)
the amount that is required to be reported
by the service recipient as an amount includible in income under § 409A(a) on
Form W–2, Box 1 and Box 12 using Code
Z, or Form 1099–MISC, Box 7 and Box
15b, as applicable.
XIV. EFFECT ON OTHER
DOCUMENTS
Taxpayers may rely on this Notice
2010–6 for taxable years beginning on

295

or after January 1, 2009. The modifications to Notice 2008–113 (relating
to operational corrections) contained in
§ XIII.A and B of this notice are effective for service provider taxable years
beginning on or after January 1, 2010,
but may be relied upon by taxpayers for
service provider taxable years beginning
before January 1, 2010; this notice does
not otherwise affect the guidance provided
in Notice 2008–113. The modifications to
Notice 2008–115 (relating to reporting and
wage withholding for 2008 and subsequent
years) described in § XIII.C of this
notice are generally effective for service
provider taxable years beginning on or
after January 1, 2009; provided, however,
that the modifications to Notice 2008–115
as a result of the guidance modifying
Notice 2008–113 (relating to operational
corrections) contained in § XIII.A and
B of this notice are effective for service
provider taxable years beginning on or
after January 1, 2010, but may be relied
upon by taxpayers for service provider
taxable years beginning before January 1,
2010.
XV. REQUEST FOR COMMENTS
The Treasury Department and the IRS
request comments regarding other document failures that commonly occur and
methods to correct them. Comments must
be submitted by April 5, 2010. All materials submitted will be available for public
inspection and copying. Comments may
be submitted to Internal Revenue Service,
CC:PA:LPD:RU (Notice 2010–6), Room
5203, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
also be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4
p.m. to the Courier’s Desk at 1111 Constitution Avenue, NW, Washington, DC
20224, Attn: CC:PA:LPD:RU (Notice
2010–6), Room 5203. Submissions may
also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2010–6)
in the subject line.
XVI. PAPERWORK REDUCTION
ACT
The collection of information contained
in this notice has been reviewed and approved by the Office of Management and

2010–3 I.R.B.

Budget in accordance with the Paperwork
Reduction Act (44 USC. 3507) under control number 1545–2164.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number.
The collection of information in this notice is in § XII. This information is required
to determine whether the taxpayers claiming the relief are eligible for the relief and
that the applicable requirements for relief
are met. The likely respondents are corporations and individuals.
The estimated annual reporting and/or
recordkeeping burden is 5,000 hours.
The estimated annual burden per respondent/recordkeeper is .5 hours.
The estimated number of respondents is
10,000.
The estimated annual frequency of response is on occasion.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax return and tax return
information are confidential, as required
by § 6103.

of certain temporary rules allowing state
and local governmental issuers to purchase
and hold their own tax-exempt bonds under special reissuance standards for tax-exempt bonds. The intent of the extensions
of these temporary rules is to facilitate liquidity and stability in the tax-exempt bond
market in recognition of some continuing credit enhancement and liquidity constraints in this market.
Notice 2008–88 amended and supplemented Notice 2008–41, 2008–15 I.R.B.
742 (April 14, 2008), regarding reissuance
standards for tax-exempt bonds to expand
the circumstances and time periods during which the Treasury Department and the
Internal Revenue Service (“IRS”) would
treat a tax-exempt bond that is purchased
by its state or local governmental issuer as
continuing in effect without resulting in a
reissuance or retirement of the purchased
bond solely for purposes of § 103 and
§§ 141 through 150 of the Internal Revenue Code, as amended (“Code”). (Except
as noted, section references in this notice
are to the Code and the Income Tax Regulations). Defined terms in Notice 2008–41
and Notice 2008–88 shall have the same
meanings when used in this notice.
SECTION 2. BACKGROUND

XVII. DRAFTING INFORMATION
The principal author of this notice is
Keith Ranta of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities), although other Treasury and IRS officials
participated in its development. For further information on the provisions of
this notice, contact Keith Ranta at (202)
927–9639 (not a toll-free number).

Extension of Temporary
Rules Allowing Governmental
Issuers to Purchase and Hold
Their Own Tax-Exempt Bonds
Notice 2010–7
SECTION 1. PURPOSE
This notice modifies Notice 2008–88,
2008–42 I.R.B. 933 (October 20, 2008),
to extend the expiration dates from December 31, 2009 to December 31, 2010

2010–3 I.R.B.

A debt instrument generally is treated
as retired or extinguished when an issuer
acquires its own debt because a merger of
the interests of the issuer and the holder occurs. Notice 2008–41 provides that under
certain rules for qualified tender bonds, a
bond purchased by or on behalf of a governmental issuer pursuant to a qualified
tender right is not retired until the end of
the 90-day period from and after the date
of such purchase. In response to liquidity
constraints in the tax exempt bond market,
§ 3.2(3)(b) of Notice 2008–41 extended
the 90-day period to 180-days for any purchase by or on behalf of a governmental
issuer pursuant to a qualified tender right
as long as such purchase occurred before
October 1, 2008.
In response to auction failures in the
auction rate bond sector of the tax-exempt
bond market, Notice 2008–41 provided
other temporary rules. Section 4 of Notice
2008–41 allowed governmental issuers
to purchase their own tax-exempt auction
rate bonds on a temporary basis without

296

resulting in a reissuance or retirement of
the purchased tax-exempt bonds solely for
purposes of § 103 and §§ 141 to 150 if the
governmental issuer purchased the tax-exempt auction rate bonds before October 1,
2008, and held those bonds for not more
than a 180-day period from the date of
purchase. Section 6.2 of Notice 2008–41
allowed temporary waivers of interest rate
caps on auction rate bonds to be disregarded in determining whether there was
a significant modification of such bonds
under § 1.1001–3(e)(2) if the agreement
to waive such a cap and the period during
which such waiver was in effect both were
within the period between November 1,
2007 and October 1, 2008.
In light of the then-continuing liquidity constraints in the tax-exempt bond market, Notice 2008–88 expanded the types
of bonds eligible for relief under Notice
2008–41 and extended the time period for
such relief provisions to apply. Section 3.1
of Notice 2008–88 provided that tax-exempt qualified tender bonds and tax-exempt commercial paper purchased by a
governmental issuer would continue in effect without resulting in a reissuance or retirement of such bonds if, irrespective of
when the governmental issuer purchased
such bonds, the governmental issuer held
the bonds until not later than December 31
2009. In addition, § 3.1 of Notice 2008–88
clarified that, in the case of the purchase
of any particular obligation of tax-exempt
commercial paper, including a purchase at
maturity, a refinancing of that purchased
tax-exempt commercial paper during the
permitted holding period would be treated
as part of the same issue as that of the purchased tax-exempt commercial paper.
Section 3.2 of Notice 2008–88 extended the application of the special
180-day holding period (in lieu of the
general 90-day holding period) for qualified tender bonds to those qualified tender
bonds purchased pursuant to qualified
tender rights until December 31, 2009.
In addition, § 3.2 of Notice 2008–88 extended the application of § 6.2 of Notice
2008–41 to disregard certain waivers of
interest rate caps on tax-exempt auction
rate bonds until December 31, 2009.

January 19, 2010