IRS Notice 2010-6: Correcting Section 409A Document Failures

IRS Notice 2010-6 is the voluntary IRS program that lets an employer fix written plan language that violates Internal Revenue Code Section 409A before the noncompliance triggers the full statutory penalty on employees. It applies to document failures in nonqualified deferred compensation plans, prescribes a specific correction for each type of defect, and requires the employer and each affected employee to attach a correction statement to their tax returns. Used correctly, it can eliminate the 409A income inclusion entirely or, under the one-year rule, reduce it to a fraction of the deferred amount. Used carelessly, it can be disregarded by the IRS and leave the penalties intact.

Why the Correction Program Exists

The penalties for a Section 409A failure fall on the employee, not the employer, and they compound. The deferred amount becomes includible in gross income in the year it vests rather than the year it is paid. A flat 20 percent additional federal income tax applies on top of the regular tax on that amount. Interest then accrues at the federal underpayment rate plus one percentage point, running back to the year the compensation was first deferred or vested, whichever came later.¹ For a longstanding deferral, the retroactive interest alone can exceed the underlying tax. Notice 2010-6 offers a way to avoid that outcome by amending the plan and reporting the fix on prescribed schedules.²

What Counts as a Document Failure

Notice 2010-6 covers document failures only. A document failure exists when the written terms of a plan violate Section 409A on their face: the plan defines a payment trigger the code doesn’t recognize, uses vague timing language, or omits a required restriction.²

An operational failure is different. That’s when the written terms comply but administration doesn’t, or when payments were actually made under noncompliant plan language. Operational failures have their own correction program under IRS Notice 2008-113, and the two often run together: fixing the document sometimes reveals that a payment was already made under the flawed terms, which requires a separate operational correction.³

Document Failures the Notice Covers

The notice prescribes specific correction methods for the following categories of drafting defects:²

Ambiguous payment timing, such as “as soon as practicable” language after a payment trigger.
Ambiguous or missing definitions of payment events like change in control or disability.
Impermissible definitions of separation from service, including plans that still rely on “termination of employment.”
Impermissible payment periods, including windows longer than 90 days or windows that condition payment on the employee completing tasks.
Impermissible payment events, whether standing alone or mixed with valid triggers.
Omission of the required six-month payment delay for specified employees of publicly traded companies.
Impermissible initial deferral elections that fall outside the windows Section 409A allows.
Employer discretion to accelerate payments beyond the narrow circumstances the code permits.
Reimbursement or in-kind benefit provisions that don’t meet Section 409A’s structural rules.

Notice 2010-80 later narrowed the program in two important ways. Relief is generally unavailable where a plan’s payment timing depends on amounts deferred under a separate qualified or nonqualified plan. Stock rights granted with an exercise price below fair market value at grant also fall outside Notice 2010-6 and are addressed under Notice 2008-113 instead.⁴

Eligibility to Use the Program

Identifying a covered defect isn’t enough. Two eligibility conditions apply on top of the category rules.

First, the sponsor must take commercially reasonable steps to find and fix the same type of failure across every nonqualified deferred compensation plan it maintains. Correcting one plan while leaving the same defect untouched in a sister plan disqualifies the relief.²

Second, neither the employer nor the affected employee can be “under examination” with respect to nonqualified deferred compensation for any year in which the document failure existed. For an individual, being under examination on the personal return for that year is enough to block relief. For a corporate employer, the standard is narrower: the company is under examination for this purpose only if it has received written notice from an IRS agent specifically identifying nonqualified deferred compensation as an issue, such as through an examination plan or an information document request. An examination that begins after the date of correction doesn’t retroactively disqualify the fix.²

How the Fixes Actually Work

Each category has its own prescribed correction. Three of the most common illustrate the pattern.

Ambiguous Payment Timing

Language promising payment “as soon as practicable” after a triggering event lets the participant effectively choose a tax year, which Section 409A treats as a disguised deferral election. The correction replaces the phrase with a specific period, typically no longer than 90 days after the event. If the window spans two tax years, the amendment must state that the employer, not the employee, controls which year the payment falls in.²

Impermissible Separation From Service Definition

Plans drafted before the final Section 409A regulations often use “termination of employment” as a payment trigger. Treasury Regulation Section 1.409A-1(h) defines separation from service based on whether the parties reasonably anticipate no further services will be performed, or that services will permanently drop to 20 percent or less of the average level over the prior 36 months. The amendment replaces the informal term with language tracking that regulatory definition.² Without the fix, an employee moving to part-time or consulting work could trigger a plan payment without a separation from service under federal law.

Missing Six-Month Delay for Specified Employees

Section 409A requires that a “specified employee” of a publicly traded company wait at least six months from separation before receiving a payment (or until death, if earlier). A specified employee is essentially a key employee under Section 416(i), which generally captures the company’s highest-paid officers.¹ Plans missing this provision, common in private companies that later went public, must add an amendment that identifies the waiting period and the class of employees it applies to.²

The One-Year Rule

Even a properly drafted amendment doesn’t guarantee full relief. For many categories, the cleanest relief depends on certain events not occurring within one year after the date of correction.²

If a sponsor corrects an impermissible separation from service definition and, within one year, an event occurs that would have triggered a payment under the old definition but not the corrected one (or vice versa), the affected employee must include 50 percent of the deferred amount in income under Section 409A. For impermissible change-in-control definitions, a non-qualifying transaction within one year of the fix causes 25 percent income inclusion.²

Timing therefore matters as much as drafting. Correcting a separation from service definition the month before a foreseeable executive departure, or fixing a change-in-control definition while a transaction is already in motion, runs directly into this rule. Corrections adopted during quiet periods carry the least risk of partial income inclusion.

The Date of Correction

Notice 2010-6 defines the “date of correction” as the latest of three dates: when the amendment is adopted, when it becomes effective, and when it is set forth in writing.² All three must occur. A board resolution adopting an amendment doesn’t count until the amendment has been reduced to writing, and a written amendment doesn’t count until it is formally adopted and effective. Sponsors should line up the three events in close succession so gaps don’t complicate the one-year rule or the reporting timeline.

A narrower initial-adoption deadline also exists for plans corrected when the first legally binding right to deferred compensation arises: the later of the end of that calendar year, or the 15th day of the third month after the right arose.²

Documentation, Employer Filing, and Employee Notices

The amendment is only half the correction. Notice 2010-6 requires specific paperwork on both the employer and the employee side, and skipping any piece can cause the IRS to disregard the fix.

Building the Internal Record

Before amending, the sponsor should identify the exact noncompliant language, list all affected participants with taxpayer identification numbers, pin down the date the failure first arose, and document the period the defective language was in effect.² The internal correction statement should cite the specific section of Notice 2010-6 relied on, describe the amendment, and stay on file for future audit questions.

Employer Tax Return

The employer must attach a correction statement to its federal income tax return for the year the amendment is adopted. This is the formal notification to the IRS that a document failure was identified and fixed.² The IRS does not issue a confirmation or approval; the sponsor self-certifies and the IRS retains the right to challenge the correction on audit.

Employee Notice

The sponsor must give each affected employee a written notice. Under Section XII.C of Notice 2010-6, that notice must contain:²

Confirmation that the employee qualifies for relief, identifying the section of the notice used.
A direction to attach a copy of the notice to the employee’s income tax return for the year of correction and for any later year requiring 409A income inclusion.
The employee’s name and taxpayer identification number.
Identification of the specific plan.
A statement that the employer has met all the requirements for the correction, the date of correction, and the date of any event causing income inclusion.
The amount involved, the amount includible in income under Section 409A, and the applicable inclusion percentage.

Employees attach their own statements to their personal returns for the corresponding year. Missing the employer filing or the employee notice can cause the IRS to disregard the correction and reinstate the full penalties.

When Fixing the Document Also Requires an Operational Correction

If payments were already made or withheld under the flawed language in a way that wouldn’t have happened under the corrected terms, the past payment error is an operational failure that must be corrected separately under Notice 2008-113.² Common pairings:

An ambiguous payment event definition that actually produced a payment inconsistent with the corrected definition.
An impermissible disability definition under which someone already received a payout; the document is fixed under Notice 2010-6, but the payment itself is corrected under Notice 2008-113.
Impermissible initial deferral elections that resulted in prior-year amounts being deferred or not deferred incorrectly; removing the election from the document doesn’t undo those amounts.

Notice 2008-113 offers its own correction methods with varying levels of relief depending on how quickly the operational error is caught and the amounts involved.³ The two notices function as a coordinated framework, and sponsors who address only the document side sometimes leave a larger operational exposure in place.

Practical Cautions

The commercially reasonable search across other plans is enforceable. If an audit finds the same defect sitting in a sister plan, relief for the plan that was corrected can be pulled. Sponsors with more than one nonqualified deferred compensation arrangement should review all of them before filing any correction.

The correction statement is a notification, not an application. The IRS issues no acceptance letter and no ruling. The sponsor proceeds on the correction’s validity and carries the burden of proving it if questioned later.

Timing decisions can be as consequential as the amendment itself. A document defect discovered during a pending merger, a foreseeable executive departure, or an active examination compresses the sponsor’s options and can push a full-relief correction into partial income inclusion under the one-year rule. Identifying and correcting defects during quiet periods, with the full documentation package assembled in advance, is where the program does its best work.

1
Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
2
Internal Revenue Service. Notice 2010-6 – Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with 409A(a)
3
Internal Revenue Service. Notice 2008-113 – Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with 409A(a)
4
Internal Revenue Service. Notice 2010-80 – Modification to the Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with 409A(a)