3555 / What rules apply to correction of errors in nonqualified deferred compensation plans excepted from Section 409A?

The IRS procedures for the voluntary correction of errors in qualified pension plans (e.g., VCP) do not apply to the correction of errors in nonqualified deferred compensation plans. Moreover, the correction of errors in connection with nonqualified deferred compensation plans was not the subject of much discussion prior to the enactment of Section 409A. However, there were legal theories for the correction of both documentation and operational administrative errors in connection with nonqualified deferred compensation plans that existed prior to Section 409A ( Q 3553).

Most documentary errors, in general, were corrected under various legal theories for the reformation of contracts (such as correction of “scrivener errors”) because nonqualified deferred compensation plans are contracts. Likewise, longstanding tax bookkeeping theories and principles were applied to correct operation plan administration errors, such as the correction of incorrectly calculated participant phantom account balances ( Q 3553).

Where plans can claim a regulatory exception from Section 409A coverage or are grandfathered from Section 409A coverage, these pre-409A legal theories remain the appropriate methods for correcting both documentary and operational plan administration errors. Some commentators believe these pre-409A legal theories still can be used to correct errors as to 409A-covered plans not covered by Notices 2008-113 and 2010-6 (as modified by Notice 2010-80), and even as to errors specifically covered by these notices. The fact that Section 409A is additive law would seem to support this position. However, the IRS takes a strict view as to the correction of errors in 409A covered plans and is unlikely to agree with corrections made outside the notices at this stage, except as to grandfathered and 409A-excepted plans, and plans that fall under the short term deferral exception ( Q 3548).

|