IRS Takes Strict View On Ability To Correct Document Failure Under Section 409A

Most practitioners agree that a document failure can be corrected without resulting in tax and penalties under Code Section 409A, and without utilizing the IRS correction program found in Notice 2010-6, if the deferred compensation is nonvested throughout the service provider's entire taxable year in which correction is made. This fix-before-vest technique arises from language in the proposed regulations regarding Section 409A income inclusion. Practitioners have disagreed, however, as to whether the language in the proposed regulations can be interpreted to permit correction at any time before vesting, even if vesting occurs later during the same taxable year as correction. Some practitioners have interpreted the language broadly as permitting correction as long as it occurs before the vesting date even at the last minute. The IRS has now set the record straight; last minute corrections are not permitted!