December 31, 2010 Deadline To Correct Non-Qualified Deferred Compensation Plans

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Section 409A of the Internal Revenue Code requires documents governing a non-qualified deferred compensation arrangement or plan ("NQDC") satisfy certain requirements. A description of these rules is in an October 13, 2008 Client Alert entitled "Year End Action Required with Respect to Non-Qualified Plans and Arrangements." This article is on our website at www.armstrongteasdale.com in the "Client Alerts Archive" section under News and Publications.

Documents governing NQDCs were required to be in compliance with Section 409A by December 31, 2008. The documents governing some NQDCs do not currently comply with Section 409A because of the complexity of the law, subsequent guidance that changes prior understanding of certain rules and the fact that some arrangements simply were not identified and modified before December 31, 2008.

On January 5, 2010, the IRS released Notice 2010-6 that provides some relief for documents that do not comply with Section 409A. Generally, there is a tax cost associated with corrections under Notice 2010-6; however, most document failures can be corrected on or before December 31, 2010 without additional tax cost. Under this notice, employers have one last opportunity to review NQDCs and make the appropriate corrections without additional tax cost. Because of the high cost of non-compliance, identifying and correcting non-compliant NQDCs should be a priority.

Failures that can be corrected under Notice 2010-6 include:

Ambiguous plan language

Improper definitions of payment events

Improper payment periods

Failure to provide for a six month delay in payment to "specified employees" of publicly traded corporations

Any failure must have been inadvertent and unintentional, commercially reasonable steps must be taken to avoid reoccurrence of the failure and neither the employee/participant nor the employer may be under examination by the Internal Revenue Service at the time of correction.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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