Notice 2007-100

Part III. Administrative, Procedural, and Miscellaneous
Modification of Q&A–23 of
Notice 2007–7
Notice 2007–99
I. Purpose
This notice modifies Q&A–23 of Notice 2007–7, 2007–5 I.R.B. 395. Notice
2007–7, Q&A–23, states that the exclusion provided under § 402(l) of the Internal
Revenue Code with respect to the payment
of certain health insurance premiums by
certain pension plans does not apply to premiums paid to an accident or health plan
that is self-insured.
II. Background
Section 402(l) of the Internal Revenue
Code, which was added by section 845(a)
of Pension Protection Act of 2006, P.L.
109–280 (“PPA ’06”), provides for an exclusion from gross income up to $3,000
annually for certain distributions paid from
an eligible governmental plan that are used
to pay qualified health insurance premiums of an eligible retired public safety
officer or his or her spouse or dependents.
The term “qualified health insurance premiums” is defined in § 402(l)(4)(D) as
“premiums for coverage for the eligible
retired public safety officer, his spouse,
and dependents, by an accident or health
insurance plan or qualified long-term
care insurance contract (as defined in
§ 7702B(b)).” (Emphasis added.) Section
402(l)(5)(A) further limits the exclusion
to premiums that are paid “directly to
the provider of the accident or health insurance plan or qualified long-term care
insurance contract.” (Emphasis added.)
Section 402(l) applies to distributions in
taxable years beginning after December
31, 2006.
Notice 2007–7, Q&A–23, provides that
premiums paid to self-insured accident or
health plans are not eligible for the § 402(l)
exclusion from gross income because, in
order to receive favorable tax treatment
under § 402(l), the accident or health plan
receiving the premium payments must be
an accident or health insurance plan. Thus,
the plan must be providing insurance issued by an insurance company regulated

December 26, 2007

by a State (including a managed care organization that is treated as issuing insurance).
In general, §§ 104(a)(3) and 105(b)
and (c) exclude from gross income certain amounts received through accident
or health insurance. Under § 105(e)(1),
amounts received under an accident or
health plan for employees are treated as
received through accident or health insurance for purposes of §§ 104 and 105.
Section 1.105–5(a) of the Income Tax
Regulations provides that an accident
or health plan may be either insured or
self-insured.
On August 2, 2007, S. 1974, the Pension Protection Technical Corrections
Act of 2007, was introduced in the Senate and, on August 3, 2007, H.R. 3361,
the Pension Protection Technical Corrections Act of 2007, was introduced in the
House of Representatives. Both bills have
identical provisions — § 9(i)(1)(B) and
(C) of S. 1974 and H.R. 3361 — which
would revise section 845(a) of PPA ’06
by deleting the word “insurance” from
the term “accident or health insurance
plan,” which occurs in both the definition
of qualified health insurance premiums in
§ 402(l)(4)(D) of the Code and the direct
payment requirement in § 402(l)(5)(A).
Because of these pending technical corrections and special considerations involving
eligible retired public safety officers, Notice 2007–7, Q&A–23, is being modified.

DRAFTING INFORMATION
The principal author of this notice
is Angelique Carrington of Employee
Plans, Tax Exempt and Government
Entities Division. For further information regarding this notice, please call
the Employee Plans customer assistance service Monday through Friday
between 8:30 a.m. and 4:30 p.m. Eastern time at (877) 829–5500 (a toll-free
number) or e-mail Ms. Carrington at
[email protected].

Transition Relief and Guidance
on Corrections of Certain
Failures of a Nonqualified
Deferred Compensation Plan
to Comply with § 409A(a) in
Operation
Notice 2007–100
I. PURPOSE
This notice provides transition relief
and guidance on the correction of certain
failures of a nonqualified deferred compensation plan to comply with § 409A(a)
in operation (an operational failure). This
transition relief and additional guidance
includes:

•

Methods for correcting certain operational failures during the taxable year
of the service provider in which the
failure occurs to avoid income inclusion under § 409A(a).

•

Transition relief limiting the amount
includible in income under § 409A(a)
for certain operational failures occurring in a service provider’s taxable
year beginning before January 1, 2010,
that involve only limited amounts.

•

An outline of, and request for comments on, a potential corrections program that would permit service recipients and service providers to limit the
amounts required to be included in income under § 409A(a) due to certain
operational failures.

III. Modification of Notice 2007–7,
Q&A–23
Notice 2007–7, Q&A–23, is modified
as follows:
Q–23. Can the accident or health plan
receiving the payments of qualified health
insurance premiums be a self-insured
plan?
A–23. Yes. An accident or health plan,
which is defined under § 105(e), includes a
self-insured plan. See § 1.105–5(a) of the
Income Tax Regulations.
IV. EFFECT ON OTHER
DOCUMENTS
Notice 2007–7 is modified.

1243

2007–52 I.R.B.

II. CORRECTIONS OF CERTAIN
OPERATIONAL FAILURES IN THE
SAME TAXABLE YEAR AS THE
FAILURE OCCURS
A. General Requirements
If an unintentional operational failure
to comply with § 409A(a) occurs, but the
operational failure is corrected in accordance with this § II, no amount is required
to be included in income under § 409A(a)
as a result of the failure. The relief provided by this § II applies only to unintentional operational failures, which means an
unintentional failure to comply with plan
provisions that satisfy the requirements of
§ 409A(a) and the guidance thereunder, or
an unintentional failure to follow the requirements of § 409A(a) in practice, due to
one or more inadvertent errors in the operation of the plan. This § II does not provide
relief for plan terms and provisions that fail
to meet the requirements of § 409A and
the applicable guidance or for operational
failures for which a correction is not described in this § II.1 Relief is not available
under this § II with respect to any intentional failure to comply with the terms of a
plan or the requirements of § 409A in the
operation of a plan. In addition, relief is
not available under this § II with respect to
any exercise of a stock right that otherwise
would result in a failure to comply with
§ 409A. Relief otherwise available under
this § II is conditioned upon the timely filing and providing of the information required by § IV of this notice.
The relief provided under this § II is not
available unless, in addition to correcting
the operational failure in accordance with
this § II, the service recipient takes commercially reasonable steps to avoid a recurrence of the operational failure. If the
same or a substantially similar operational
failure has occurred previously, the relief
is not available for any taxable year of the
service provider beginning after December 31, 2008, unless the service recipient
demonstrates that the service recipient had
established practices and procedures reasonably designed to ensure that such an operational failure would not recur, had taken
commercially reasonable steps to avoid a
recurrence of the operational failure, and

the operational failure occurred despite the
diligent efforts of the service recipient.
Relief is not available under this § II
with respect to any intentional failure to
comply with the terms of a plan or the requirements of § 409A in the operation of
a plan. The relief provided in this section also is not available with respect to
an operational failure that is egregious,
or where the failure is directly or indirectly related to participation in an abusive tax avoidance transaction (meaning
for this purpose any listed transaction under § 1.6011–4(b)(2)).
In each instance, the taxpayer claiming
the relief has the burden of demonstrating
that the taxpayer was eligible for the relief
and that the requirements of this section
have been met. Any application of the
relief provided in this section is subject to
examination by the IRS.
B. Failure to Defer Amount or Incorrect
Payment Corrected in the Same Taxable
Year
This § II.B applies to amounts of nonqualified deferred compensation that, under the terms of the plan and any applicable deferral election, and § 409A and
the applicable guidance, should not have
been paid or made available to a service
provider in a taxable year of the service
provider, but were paid or made available
in that year due to an unintentional operational failure with respect to the plan, other
than a payment that fails to meet the requirements of § 409A(a)(2)(B)(i) and the
applicable guidance thereunder (requirement to delay for six months payments
to a specified employee upon separation
from service). For rules relating to correction of certain payments made in violation
of § 409A(a)(2)(B)(i) and the applicable
guidance under that section, see § II.C of
this notice.
An amount to which this § II.B applies
is treated as having been timely deferred
in accordance with the terms of the plan
and any applicable deferral election (or as
having continued to be deferred under the
terms of the plan) if the service provider
repays to the service recipient the amount
that was erroneously paid or made available to the service provider on or before

the last day of the service provider’s taxable year in which such amount was erroneously paid or made available, and immediately after such repayment the service
provider has a legally binding right under
the plan to be paid the amount that would
have been due if such amount had not been
erroneously paid or made available to the
service provider during such taxable year,
at the same time and in the same form of
payment that the amount would have been
payable if such amount had not been erroneously paid or made available to the service provider during such taxable year.
In addition, if the total of all amounts
to which this § II.B applies that are erroneously paid or made available under a
plan (as defined for purposes of § 409A)
in a service provider’s taxable year exceeds the limit on elective deferrals that
would apply to a qualified plan under
§ 402(g)(1)(B) for the year in which the
erroneous payment was made and the
service provider is an insider (as defined
in this § II.B) with respect to the service
recipient, to qualify for the relief provided
in this section, the service provider must
also pay interest to the service recipient
at the time the service provider repays the
amount to the service recipient equal to
the amount of the erroneous payment (E)
multiplied by the short-term applicable
Federal rate (AFR) under § 1274(d)(1) (r)
multiplied by a fraction, the numerator
of which is the number of days from the
erroneous payment date to the repayment
date (n1) and the denominator of which is
the number of days in such taxable year
(n2), or (E x r x n1/n2). For purposes of
the preceding sentence, r is the short-term
AFR, based on annual compounding, for
the month in which the erroneous payment was paid or made available to the
service provider. For purposes of counting
days under this § II.B, the first day of the
period is disregarded and the last day is
taken into account. Where a repayment
is made through a reduction of the service provider’s other compensation, the
repayment date occurs on each date the
compensation otherwise would have been
paid to the service provider, and if the
amount withheld on a repayment date is
less than the entire erroneous payment, the
interest calculation in the preceding sen-

1 Reliance on the transition relief provided in Notice 2007–86, 2007–46 I.R.B. 990, the preamble to the final regulations under § 409A, 72 Fed. Reg. 19234, Notice 2006–79, 2006–43 I.R.B.
763, the preamble to the proposed regulations under § 409A, 70 Fed. Reg. 57930, or Notice 2005–1, 2005–1 C.B. 274, for the years to which such transition relief applies, does not preclude
a taxpayer from qualifying for the relief provided in this notice with respect to unintentional operational errors occurring in taxable years beginning before January 1, 2009.

2007–52 I.R.B.

1244

December 26, 2007

tence is applied by substituting the unpaid
balance immediately before the repayment
for the amount of the erroneous payment.
For purposes of this notice, a service
provider is an insider with respect to a service recipient if the service provider is a
director or officer of the service recipient
or is directly or indirectly the beneficial
owner of more than 10 percent of any class
of any equity security of the service recipient, determined in accordance with the
rules of the Securities and Exchange Commission under § 16 of the Securities Exchange Act of 1934, as amended, 15 USC
78p, without regard to whether the service
recipient has any class of equity securities
registered under § 12 of such Act, 15 USC
78l. See 17 CFR § 240.16a–1(a) (beneficial owner) and (f) (officer). In the case of
a service recipient that is not a corporation,
such rules are applied by analogy.
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 last day of
such taxable year. Alternatively, in lieu of
such repayment, the service recipient may
reduce the service provider’s compensation that otherwise would have been paid
during such taxable year by an equivalent
amount on or before the last day of such
taxable year. In either case, an amount
will not be treated as paid by the service
provider if, in connection with such payment, the service recipient pays the service
provider, or otherwise provides a benefit
(including 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.
The amount erroneously paid to the service provider that is repaid by the service
provider to the service recipient is not required to be included in income by the service provider, or reported as income to the
service provider on a Form W–2 or Form
1099 by the service recipient. To the extent employment taxes have been withheld
and paid with respect to such payment, appropriate adjustments should be made under the applicable rules under § 6413. 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

December 26, 2007

that would have been paid to the service
provider, but instead is used to repay the erroneous payment or to pay any required interest on the erroneous payment, is includible in income (and wages if the service
provider is an employee); however, any
employment taxes withheld and paid with
respect to the original erroneous payment
may be applied to satisfy the requirement
to withhold and pay employment taxes on
such compensation, in which case no adjustment to the employment taxes previously withheld and paid should be made.
For purposes of this § II.B, the service provider’s account balance or other
amount of deferred compensation under
the plan may be adjusted for earnings (or
losses) retroactive to the date the amount
should have been credited to the service
provider’s account or otherwise deferred
(or if the amount should have otherwise
remained deferred compensation after the
end of the service provider’s taxable year,
retroactive to the date the amount was paid
or made available), provided that such adjustment must be made on or before the last
day of such taxable year (or if it is impracticable to make the adjustment by the end
of such taxable year, the service provider
(in the case of earnings) and the service recipient (in the case of losses) must have a
legally binding right to have such adjustment made on or before the last day of such
taxable year).
The relief provided in this § II.B is not
available with respect to any erroneous
payment occurring during any taxable
year of the service provider in which
the service recipient experienced a substantial financial downturn or otherwise
experienced financial or other issues that
indicated a significant risk that the service recipient would not be able to pay
the amount deferred when the payment
became due.
In each of the following examples, it is
assumed that Employer does not make any
payment to Employee, or otherwise provide a benefit (including an obligation to
pay an amount or provide a benefit in the
future) to or on behalf of Employee, that is
intended as a substitute for all or part of the
amount that Employee pays to Employer
(or the reduction in compensation otherwise payable to Employee), that Employee
is an individual whose taxable year is the
calendar year, that Employer did not experience a substantial financial downturn

1245

or otherwise experience financial or other
issues that indicated a significant risk that
the service recipient would not be able to
pay the amount deferred when the payment
became due, and that Employee and Employer each satisfy the other applicable requirements of this § II.
Example 1: Employee, who is not an insider with
respect to Employer, makes a timely election to defer 50% of a bonus payable in 2007 pursuant to an
account balance plan maintained by Employer. The
bonus is $100,000. Due to an unintentional operational failure with respect to the plan, Employer defers only 10% of the bonus, or $10,000, and pays
Employee the other $90,000 in 2007 (including the
$40,000 that should have been deferred). The deferral is treated as made in accordance with the terms
of the plan and the deferral election if, on or before
December 31, 2007, the additional $40,000 is credited to Employee’s account balance and Employee
pays Employer $40,000. The $40,000 erroneously
paid to Employee is not required to be included in income by Employee or reported by Employer on Form
W–2. Alternatively, in lieu of the $40,000 repayment
by Employee to Employer, compensation otherwise
payable to Employee in 2007 (such as salary payments) may be reduced by $40,000, provided that the
$40,000 reduction in Employee’s compensation used
to repay the amount (but not the $40,000 erroneous
payment) is included in income by Employee and reported as wages by Employer on the 2007 Form W–2.
Employer may also adjust Employee’s account to reflect the earnings (or losses) that would have been allocated to Employee’s account had the amount been
timely deferred and credited to Employee’s account
balance, if such adjustment for earnings (or losses)
is made on or before December 31, 2007. Alternatively, if it is impracticable to make the adjustment on or before December 31, 2007, such adjustment may be made later retroactively to December
31, 2007, provided that Employee and Employer each
has a legally binding right on December 31, 2007
with respect to such adjustment. For example, if the
original incorrect deferral would have been credited
with 10% in deemed investment earnings, the deferral plus earnings would be $11,000. This amount
must be increased by the $40,000 repaid by Employee
and may also be increased by an additional $4,000
($40,000 multiplied by 10%), to result in the $55,000
account balance that would have been reflected had
the amount been properly deferred. If the original incorrect deferral would have been charged with 10%
in deemed investment losses, the deferral less losses
would be $9,000. This account balance must be increased by the $40,000, but may also be reduced by
$4,000, for a net increase of $36,000, to result in the
$45,000 account balance that would have been reflected had the amount been properly deferred.
Example 2: Pursuant to a nonqualified deferred
compensation plan sponsored by Employer, Employee, who is an insider with respect to Employer, is
scheduled to receive a $10,000 installment payment
in 2007 that is not subject to the 6-month delay for
payments to specified employees upon separation
from service under § 409A(a)(2)(B)(i). Due to an
unintentional operational failure with respect to the
plan, Employer pays Employee $11,000. The installment payment is treated as made in accordance

2007–52 I.R.B.

with the terms of the plan and the deferral election if
on or before December 31, 2007, the excess $1,000
payment is credited to Employee’s account balance,
and Employee pays Employer $1,000. The $1,000
is not required to be included in income by Employee or reported by Employer as wages on Form
W–2. Alternatively, in lieu of the $1,000 payment by
Employee to Employer, Employee’s compensation
otherwise payable in 2007 (such as salary payments)
may be reduced by $1,000, provided that the $1,000
reduction in Employee’s compensation used to repay
the amount (but not the $1,000 erroneous payment)
is included in income by Employee and reported by
Employer as wages on the 2007 Form W–2. Because
the excess $1,000 payment does not exceed the applicable limit on elective deferrals that would apply
to a qualified plan under § 402(g)(1)(B), Employee
is not required to pay any interest to qualify for
the relief. Employer may also adjust Employee’s
account to reflect the earnings (or losses) that would
have been allocated to Employee’s account had the
amount been timely deferred and credited to Employee’s account balance, if such adjustment for
earnings (or losses) is made on or before December
31, 2007. Alternatively, if it is impracticable to make
the adjustment on or before December 31, 2007,
such adjustment may be made later retroactively to
December 31, 2007, provided that on December 31,
2007, Employee and Employer each has a legally
binding right with respect to such adjustment.
Example 3: Employee, who is an insider with respect to Employer, makes a timely election to defer
80% of a $100,000 bonus payable on July 1, 2009,
pursuant to an account balance plan maintained by
Employer. Due to an unintentional operational failure with respect to the plan, Employer defers only
10% of the bonus, or $10,000, and pays Employee the
other $90,000 (including $70,000 that should have
been deferred) on July 1, 2009. Assume for purposes
of this example that the short-term AFR, based on annual compounding, for July 2009 is 4.0 percent. Employer notifies Employee of the error and Employee
pays Employer $70,705.75 on October 1, 2009, consisting of the $70,000 erroneous payment plus interest
equal to $705.75 ($70,000 x .04 x 92/365) (because
the erroneous payment exceeds the limit on elective
deferrals that would apply to a qualified plan under
§ 402(g)(1)(B) for 2009 and Employee is an insider).
The deferral is treated as made in accordance with
the terms of the plan under this § II.B. The $70,000
is not required to be included in income by Employee
or reported as wages by Employer on Form W–2. Alternatively, in lieu of the $70,705.75 payment by Employee to Employer, compensation otherwise payable
to Employee in 2009 (such as salary payments) may
be reduced by $70,000 plus applicable interest, in
which case the reduction in Employee’s compensation used to repay the amount plus interest (but not
the erroneous $70,000 payment) must be reported by
Employer as wages on the 2009 Form W–2 issued
to Employee and included in Employee’s income for
2009. Employer may also adjust Employee’s account
to reflect the earnings that would have been allocated
to Employee’s account had the amount been timely
deferred and credited to Employee’s account balance,
if such adjustment for earnings is made on or before
December 31, 2009. Alternatively, if it is impracticable to make the adjustment on or before December
31, 2009, such adjustment may be made retroactively

2007–52 I.R.B.

to December 31, 2009, provided that Employee and
Employer each have a legally binding right on December 31, 2009 with respect to such adjustment.

C. Incorrect Payment in Violation of
§ 409A(a)(2)(B)(i) Corrected in the Same
Taxable Year
This section applies to amounts of nonqualified deferred compensation that, under the terms of the plan and any applicable
deferral election, and § 409A(a)(2)(B)(i)
(requirement to delay for six months
payments to a specified employee upon
separation from service) and the applicable guidance, should not have been paid
or made available to a service provider for
at least six months following the service
provider’s separation from service, but
that were paid or made available to the
service provider before the expiration of
such six-month period due to an unintentional operational failure with respect to
the plan. For the ability to correct certain
other payments in violation of § 409A and
the applicable guidance, see § II.B of this
notice.
With respect to an amount to which this
§ II.C applies, the service provider will
not be treated as having failed to comply
with § 409A(a)(2)(B)(i) and the terms of
the plan and any applicable deferral election as a result of the amount being paid or
made available at the earlier date if, on or
before the last day of the service provider’s
taxable year in which the amount was paid
or made available, the service provider repays to the service recipient the amount
that was erroneously paid or made available to the service provider, immediately
after such repayment the service provider
has a legally binding right to receive such
amount from the service recipient on the
date that is the same number of days after the later of (i) the date the amount
would otherwise have been payable under the terms of the plan and the applicable deferral election or (ii) the date of
the repayment as the number of days from
the date the service recipient made the erroneous payment to the service provider
through the date the service provider repaid the erroneous payment to the service
recipient, and the repaid amount is not paid
or made available to the service provider
before such date. For purposes of counting days under this § II.C, the first day
of the period is disregarded and the last
day is taken into account (for example, if

1246

on June 1, 2008, a service recipient mistakenly paid a service provider an amount
that the service provider repaid on June
30, 2008, there would be 29 days from the
date of payment through the date of repayment).
If the requirements of this § II.C are
met, the original payment from the service recipient to the service provider that
has been repaid to the service recipient is
not required to be reported as income on
Form W–2 or Form 1099, as applicable.
To the extent employment taxes have been
withheld and paid with respect to such
payment, appropriate adjustments should
be made under the applicable rules under
§ 6413. However, the subsequent payment
of the amount by the service recipient to
the service provider is required to be reported appropriately as income on Form
W–2 or Form 1099, as applicable, and subject to the applicable employment taxes. If
the payment is deductible by the service recipient, the taxable year in which such deduction is allowable will be determined in
accordance with § 404(a)(5) and the service recipient’s method of accounting.
The relief provided in this section
is not available with respect to any erroneous payment occurring during any
taxable year of the service provider in
which the service recipient experienced a
substantial financial downturn or otherwise experienced financial or other issues
that indicated a significant risk that the
service recipient would not be able to pay
the amount deferred when the payment
became due.
In each of the following examples, it is
assumed that: Specified Employee is an
individual whose taxable year is the calendar year; at all relevant times Specified
Employee is a specified employee of Employer for purposes of § 409A(a)(2)(B)(i);
at all relevant times Employer is not experiencing any substantial financial downturn or any other financial or other issue
that indicates a significant risk that Employer would not be able to pay the relevant deferred amounts when due; and Employee and Employer each satisfy the other
applicable requirements of this § II.
Example 1: Under a nonqualified deferred compensation plan sponsored by Employer, Specified
Employee has a legally binding right to a payment of
deferred compensation on the first day of the seventh
month following Specified Employee’s separation
from service. Specified Employee separates from
service on November 15, 2007 so that the payment

December 26, 2007

is due on June 1, 2008. Due to an unintentional operational failure with respect to the plan, Employer
pays Specified Employee the amount of deferred
compensation on May 1, 2008. Employer discovers
the error on July 1, 2008, and Specified Employee
repays the amount to Employer on July 1, 2008 (61
days after the erroneous payment). Provided that immediately after such repayment Specified Employee
has a legally binding right to receive the amount
from Employer on August 31, 2008 (61 days after
the July 1, 2008 repayment date) and Employer does
not repay the amount to Specified Employee before
that date, Specified Employee will not be treated
as having failed to comply with § 409A(a)(2)(B)(i)
and the terms of the plan and the applicable deferral
election solely as a result of the early payment.
Example 2: Under a nonqualified deferred compensation plan sponsored by Employer, Specified
Employee has a legally binding right to a payment
of deferred compensation payable on the first day
of the seventh month following separation from
service. Specified Employee separates from service on May 1, 2008 so that the payment is due on
December 1, 2008. Due to an unintentional operational failure with respect to the plan, Employer
pays Specified Employee the amount of deferred
compensation on May 1, 2008. Employer discovers
the error and Specified Employee repays the amount
to Employer on July 1, 2008 (61 days after the erroneous payment). Provided that immediately after
such repayment Specified Employee has a legally
binding right to receive the amount from Employer
on January 31, 2009 (61 days after December 1,
2008) and Employer does not repay the amount to
Specified Employee before that date, Specified Employee will not be treated as having failed to comply
with § 409A(a)(2)(B)(i) and the terms of the plan
and the applicable deferral election solely as a result
of the early payment. The erroneous payment is not
includible in Specified Employee’s income, and is
not required to be reported on the 2008 Form W–2.
Such amount is includible in Specified Employee’s
income in the year in which the amount is repaid
by Employer to Specified Employee pursuant to the
plan, and is required to be reported on that year’s
Form W–2 and subject to applicable employment
taxes.

D. Excess Deferred Amount Corrected in
the Same Taxable Year
If under the terms of a plan and an applicable deferral election, and § 409A and
the applicable guidance, an amount that
should not have been deferred compensation under the plan is credited to the service
provider’s account or otherwise treated as
deferred compensation under the plan as a
result of an unintentional operational failure with respect to 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 un-

December 26, 2007

der the plan, the excess amount is not
treated as an amount deferred under the
plan if the excess amount is paid to the
service provider on or before the last day
of the service provider’s taxable year in
which the excess amount was incorrectly
treated as deferred compensation. The
amount to which the service provider has
a legally binding right under the plan at
the end of the year must be adjusted to reflect the payment (for example, through a
reduction in the account balance). In addition, if the service provider is an insider
with respect to the service recipient (as defined in § II.B of this notice), the remaining
account balance (or other deferred compensation under the plan) must be adjusted
for positive earnings retroactive to the date
the excess amount was incorrectly credited
to the service provider’s account or otherwise incorrectly treated as deferred under the plan, provided that such adjustment
must be made on or before the last day
of the service provider’s taxable year in
which such amount was incorrectly treated
as deferred compensation under the plan
(or if it is impracticable to make the adjustment by the end of such year, the service recipient must have a legally binding right on the last day of such taxable
year to make such adjustment retroactively
to such date). In other cases, such adjustment may be (but is not required to
be) made. Where the amount was subject
to losses, the remaining account balance
(or other deferred compensation under the
plan) is not required to be adjusted, but
may be adjusted for such losses retroactive to the date the excess amount was incorrectly credited to the service provider’s
account or otherwise incorrectly treated as
deferred under the plan, provided that such
adjustment must be made on or before the
last day of the service provider’s taxable
year in which such amount was incorrectly
treated as deferred compensation under the
plan (or if it is impracticable to make the
adjustment by the end of such taxable year,
the service provider must have a legally
binding right on the last day of such taxable year to require that such an adjustment
be made retroactively to the date of the
failure). The service recipient may (but is
not required to) pay reasonable interest to
(or otherwise reasonably compensate) the
service provider to reflect the time value
of money with respect to the late payment, provided that such interest or other

1247

compensation is paid or made available by
the end of the service provider’s taxable
year in which such amount was incorrectly
treated as deferred compensation under the
plan.
This relief is not applicable to a service
recipient’s failure to timely pay in the
proper taxable year of a service provider
amounts that were deferred in one or
more previous taxable years of the service
provider. However, see § 1.409A–3(d) for
certain circumstances under which such
payments may be treated as made in accordance with a designated payment date.
Example: Employee, who is an insider with respect to Employer and whose taxable year is the calendar year, makes a timely election pursuant to an
account balance plan to defer 10% of a bonus otherwise payable in 2007. The bonus is $100,000. Due
to an unintentional operational failure with respect
to the plan, Employer defers 50% of the bonus, or
$50,000, and pays Employee $50,000 (instead of deferring $10,000 and paying Employee $90,000). The
excess $40,000 will not be treated as deferred under
the plan if on or before December 31, 2007, Employer
pays Employee $40,000 of the account balance under
the plan, and Employee and Employer each satisfy
the other applicable requirements of this § II. The remaining account balance must be adjusted for earnings and may be adjusted for losses that were allocable to such amount under the plan. For example, if
the account was credited with 10% in deemed investment earnings, the account balance must be reduced
by both the $40,000 paid to Employee and the $4,000
in earnings, or $44,000, to result in the $11,000 account balance that would have been reflected had the
deferred compensation under the plan been properly
deferred. The adjustment must be made by December 31, 2007, except that the adjustment can be made
later, retroactively as of that date, if it is impracticable to make the adjustment by December 31, 2007
and the service recipient has a legally binding right
on that date to make such a retroactive adjustment.
If the account was charged with 10% in deemed investment losses, the account balance must be reduced
by the $40,000, but may be increased not later than
December 31, 2007, by the $4,000 in losses on the
improperly deferred amount, for a net reduction of
$36,000, to result in the $9,000 account balance that
would have been reflected had the deferred compensation under the plan been properly deferred. Alternatively, if it is impracticable to make the adjustment
on or before December 31, 2007, such $4,000 adjustment may be made later retroactively to December
31, 2007, provided that the service provider has a
legally binding right on December 31, 2007, to have
such adjustment made. Employer may (but is not required to) pay Employee reasonable interest on the
$40,000 erroneous deferral provided such payment is
made by December 31, 2007.

E. Correction of Exercise Price of
Otherwise Excluded Stock Rights
This § II.E applies if under the terms
of a stock right, the stock right would

2007–52 I.R.B.

not be nonqualified deferred compensation
under § 1.409A–1(b)(5)(i)(A) (excluded
stock options) or § 1.409A–1(b)(5)(i)(B)
(excluded stock appreciation rights), except that the exercise price of the stock
right is less than the fair market value of
the underlying stock on the date of grant.
This section applies only if the failure of
the exercise price to equal or exceed the
fair market value of the underlying stock
results from an unintentional administrative error in determining the exercise price.
If this section applies to a stock right, the
stock right is treated from the date of grant
as not providing for nonqualified deferred
compensation for purposes of § 409A. This
section applies if before the stock right is
exercised and not later than the last day of
a service provider’s taxable year in which
the service recipient granted the service
provider the stock right, the exercise price
is reset to an amount equal to or exceeding the fair market value of the underlying
stock on the date of grant, and at all times
before such increase in the exercise price
the stock right otherwise would not have
provided for nonqualified deferred compensation for purposes of § 409A. For example, assume that on January 1, 2008, an
employer grants an employee a stock option to purchase 100 shares of stock, and
the stock option would otherwise be excluded from coverage under § 409A except
that due to an unintentional administrative
error the exercise price is set at an amount
below the fair market value of the stock
on January 1, 2008. Assume further that
on July 1, 2008, the employee partially exercises the stock option and purchases 40
shares, but retains a stock option to purchase 60 shares. Provided that on or before December 31, 2008, the exercise price
of the remaining stock option to purchase
60 shares is reset to a price at or above the
fair market value of the underlying stock
on January 1, 2008, the stock option to purchase 60 shares may qualify for the relief
provided in this section. Because the exercise price was not reset before July 1, 2008,
the portion of the stock option that was exercised to purchase 40 shares is not eligible
for the relief provided in this section.

2007–52 I.R.B.

III. TRANSITION RELIEF
FOR CERTAIN OPERATIONAL
FAILURES INVOLVING LIMITED
AMOUNTS OCCURRING DURING
TAXABLE YEARS BEGINNING
BEFORE 2010
A. General Requirements
If an unintentional operational failure
to comply with § 409A(a) occurs during a
service provider’s taxable year beginning
before January 1, 2010, but the operational
failure qualifies for the relief provided in
this § III and is corrected in accordance
with this § III, the amount required to be
included in income under § 409A(a) as a
result of the failure, and the resulting additional taxes under § 409A, are limited in
accordance with the provisions of this section. In each instance, the taxpayer claiming the relief (the service provider, the service recipient, or both) has the burden of
demonstrating that such taxpayer was eligible for the relief and that the requirements of this section have been met. Any
application of the relief provided in this
section is subject to examination by the
IRS.
The relief provided by this section applies only to unintentional operational failures, which means an unintentional failure to comply with plan provisions that
satisfy the requirements of § 409A(a) and
the guidance thereunder, or an unintentional failure to follow the requirements of
§ 409A in practice, due to one or more
inadvertent errors in the operation of the
plan. This notice does not apply to plan
terms that fail to meet the requirements of
§ 409A and applicable guidance or to operational failures for which a correction is
not provided in this § III.
The relief provided under this § III is
not available unless, in addition to correcting the operational failure in accordance
with this § III, the service recipient takes
commercially reasonable steps to avoid a
recurrence of the operational failure. For
any taxable year of the service provider beginning after December 31, 2008, if the
same or a substantially similar operational
failure has occurred previously, the service recipient must demonstrate that the
service recipient had established practices
and procedures reasonably designed to ensure that such an operational failure would
not recur, had taken commercially reason-

1248

able steps to avoid a recurrence of the operational failure and that the operational
failure occurred despite the diligent efforts
of the service recipient. Relief otherwise
available under this § III is conditioned
upon the timely filing and providing of the
information required by § IV of this notice.
The relief provided by this section is
not available with respect to any failure
unless all of the requirements of this section (other than the requirements of § IV
of this notice) have been satisfied not later
than the end of the second taxable year
of the service provider following the taxable year of the service provider in which
such failure occurred. In addition, the relief provided in this section is not available
if a federal income tax return of the service provider for the taxable year of the
service provider in which the failure occurred is under examination with respect
to the plan. For this purpose, an individual
service provider is treated as under examination with respect to the plan if the individual is under examination with respect to
the individual’s federal income tax return
(for example, Form 1040) for the taxable
year.
Relief is not available under this § III
with respect to any intentional failure to
comply with the terms of a plan or the requirements of § 409A in the operation of
a plan. The relief provided in this section also is not available with respect to
an operational failure that is egregious,
or where the failure is directly or indirectly related to participation in an abusive tax avoidance transaction (meaning
for this purpose any listed transaction under § 1.6011–4(b)(2)). The relief provided
in this section also is not available with respect to a failure to comply with § 409A
resulting from an exercise of a stock right.
B. Failure to Defer Limited Amount not
Corrected in the Same Taxable Year and
Certain Erroneous Payments
This § III.B applies if during a service
provider’s taxable year beginning before
January 1, 2010, an unintentional operational failure occurs that meets the following requirements:
(1) An amount should have been treated
as deferred compensation under the terms
of the plan and any applicable deferral
election, and § 409A and the applicable
guidance, but the amount was not credited

December 26, 2007

to the service provider’s account or otherwise treated as deferred compensation during the service provider’s taxable year, or
did not remain deferred compensation after the end of such year;
(2) Because the amount was not credited to the service provider’s account or
otherwise treated as deferred compensation under the plan during such year, or
did not remain deferred compensation under the plan after the end of such year,
the amount was paid or made available
to the service provider during the service
provider’s taxable year;
(3) Section II.B of this notice does not
apply because relief is not available under
§ II.B of this notice with respect to the
failure, the failure is not corrected under
§ II.B of this notice, or otherwise; and
(4) The amount paid or made available
to the service provider does not exceed the
limit on elective deferrals that would apply
to a qualified plan under § 402(g)(1)(B) for
the year of the operational failure.
In such a case, if the plan is otherwise
compliant with the requirements of § 409A
and the applicable guidance, the amount
includible in income under § 409A(a)
as a result of such payment is limited to
the amount that should have been treated
as deferred compensation under the plan
(or should have continued to be deferred
compensation under the plan) but was
instead paid or made available to the service provider, and does not include any
other amounts deferred under the plan.
In addition, with respect to such amount
includible in income under § 409A(a), the
service provider is required to pay the additional tax under § 409A(a)(1)(B)(i)(II)
(the additional 20% tax), but is not required to pay the additional tax under
§ 409A(a)(1)(B)(i)(I) (the premium interest tax).
For purposes of this section, a payment of an amount (including a payment
of an amount that is one of a series of
installment payments or life annuity payments) that under the terms of the plan
and § 409A(a)(2)(B)(i) and the applicable guidance is required to be delayed
for at least six months following a separation from service, but is paid before
the completion of that six months, may
be treated as the payment of an amount
that should have continued to be deferred
compensation. In addition, for purposes
of this section, the plan includes any ar-

December 26, 2007

rangements treated as a single plan under
§ 1.409A–1(c), so that this section will
apply only if any and all erroneous payments under the plan, in the aggregate, of
amounts that otherwise should have been
treated as deferred compensation with respect to the service provider during the
taxable year (or should have continued
to be deferred compensation during the
taxable year), do not exceed the limit on
elective deferrals that would apply to a
qualified plan under § 402(g)(1)(B) for
such year. The relief provided in this
§ III.B is not available if the operational
failure occurred during a taxable year of
the service provider in which the service
recipient experienced a substantial financial downturn or otherwise experienced
financial or other issues that indicated a
significant risk that the service recipient
would not be able to pay the amount deferred when the payment became due.
It is assumed for purposes of the following examples that: Employee is an individual whose taxable year is the calendar year;
Employee’s tax return is not under examination for any relevant period; during all
relevant periods Employer did not experience any financial downturn or financial
or other issues indicating a significant risk
that Employer would not be able to pay
relevant deferred amounts when due; and
Employee and Employer each satisfy the
other applicable requirements of this § III.
Example 1: Employee makes a timely election to
defer 10% of a bonus payable in 2007 pursuant to an
account balance plan. The bonus is $10,000. Due
to an unintentional operational failure with respect
to the plan, Employer defers only 8% of the bonus,
or $800, and pays Employee $9,200 (instead of deferring $1,000 and paying Employee $9,000). The
amount is not corrected by December 31, 2007, when
Employee’s account balance is $100,000. As a payment to Employee, Employer must treat the amount
as a wage payment for employment tax and reporting
purposes, as appropriate, including reporting as income and wages on the 2007 Form W–2. Employer
is permitted to report as income under § 409A on the
2007 Form W–2 (or 2007 Form W–2c), Box 12, using Code Z, only $200, and Employee is permitted to
include in income under § 409A for 2007 only $200.
Furthermore, Employee is permitted to pay the additional 20% tax only with respect to the $200 (or $40
in additional income tax), and is not required to pay
the premium interest tax.
Example 2: Employee is a specified employee
entitled under a nonqualified deferred compensation
plan to a life annuity commencing upon the first
day of the seventh month following the specified
employee’s separation from service. The annuity
payments are $2,000 per month. Employee separates
from service on April 18, 2007, and is scheduled to
receive an initial annuity payment on November 1,

1249

2007. Due to an inadvertent miscalculation of the
specified employee’s separation from service date,
Employee receives a $2,000 payment on October 1,
2007, before the end of the 6-month period following
Employee’s separation from service. Employer and
Employee do not discover the error until 2008, so that
the relief provided in § II.C of this notice is not available. As a payment to Employee, Employer must
treat the amount as a wage payment for employment
tax and reporting purposes, as appropriate, including
reporting as income on the 2007 Form W–2. Employer is permitted to report as income under § 409A
on the 2007 Form W–2 (or 2007 Form W–2c), Box
12, using Code Z, only $2,000, and Employee is
permitted to include in income under § 409A in 2007
only $2,000. Furthermore, Employee is permitted to
pay the additional 20% tax only with respect to the
$2,000 (or $400 in additional income tax), and is not
required to pay the premium interest tax.

C. Limited Excess Deferred Amount not
Corrected in the Same Taxable Year
This § III.C applies if on or before the
last day of a service provider’s taxable year
beginning before January 1, 2010, the following requirements are met:
(1) Under the terms of the plan and any
applicable deferral election, and § 409A
and the applicable guidance, an amount
of deferred compensation under the plan
should have been paid or made available
to the service provider during the service
provider’s taxable year, or an amount is
treated as deferred compensation under the
plan that should have been paid or made
available to the service provider during the
service provider’s taxable year, but such
amount is not paid or made available due
to an unintentional operational failure with
respect to the plan;
(2) Section II.D of this notice does not
apply because relief is not available under
§ II.D of this notice with respect to the
failure, the failure is not corrected under
§ II.D of this notice, or otherwise;
(3) The amount that should have been
paid or made available to the service
provider during that service provider’s
taxable year does not exceed the limit on
elective deferrals that would apply to a
qualified plan under § 402(g)(1)(B) for
such year;
(4) By the later of the end of the service
provider’s taxable year in which the failure is discovered or the fifteenth day of the
third month following the date upon which
the failure is discovered, the service recipient pays the service provider the amount
that should have been paid or made available to the service provider, provided that

2007–52 I.R.B.

any earnings allocable to such amounts
through the date of the payment are either forfeited or added to the payment to
the service provider, and any losses allocable to such amounts through the date of
the payment are either permanently disregarded or subtracted from the payment to
the service provider, and the service recipient reports such payment on a Form W–2
or Form 1099, as applicable, in accordance
with the requirements of this section; and
(5) The service provider includes such
amount in income and pays the additional
taxes under § 409A(a) as described in this
section on a timely filed federal income tax
return (including an income tax return filed
in accordance with a timely request for extension, but not including an amended income tax return).
In such a case, if the plan otherwise
complies with the requirements of § 409A
and the applicable guidance, the amount
includible in income under § 409A(a) as a
result of such failure is limited to the excess amount paid to the service provider,
and does not include any other deferred
compensation under the plan, and the
amount is includible in income only when
paid to the service provider in accordance
with this section. In addition, with respect
to this amount includible in income under
§ 409A(a), the service provider is required
to pay the additional 20% tax, but is not
required to pay the premium interest tax.
If the service recipient properly reports
the payment as includible in income under
§ 409A on a Form W–2, if applicable, for
the year in which the payment was made,
including reporting such amount on Form
W–2, Box 12 using Code Z, the service
recipient will not be subject to penalties
or liability for the failure to properly withhold under § 3402.
For purposes of this section, the plan
includes any arrangements treated as a
single plan under § 1.409A–1(c), so that
this section will apply only if any and
all erroneous deferrals under the plan, in
the aggregate, of amounts that otherwise
should have been paid during the service provider’s taxable year to the service
provider do not exceed the applicable limit
on elective deferrals that would apply to a
qualified plan under § 402(g)(1)(B).
Example: Employee, who has a calendar year taxable year, makes a timely election to defer 8% of a
bonus payable in 2007 into an account balance plan.
The bonus is $10,000. Due to an unintentional operational failure with respect to the plan, Employer

2007–52 I.R.B.

defers 10% of the bonus, or $1,000, and pays Employee $9,000 (instead of deferring $800 and paying
Employee $9,200). The plan otherwise complies with
§ 409A and the applicable guidance. Employer discovers the error on February 1, 2008, so that the excess deferred amount of $200 is not corrected by December 31, 2007. On March 1, 2008, at which time
Employee’s account balance includes $15 in earnings
on the excess $200 credited to the account, Employer
pays Employee $215. Employer reports the $215 as
income under § 409A on the 2008 Form W–2, Box
1 and Box 12, using Code Z and satisfies the other
applicable requirements of this § III, including the
requirements of § IV of this notice. Provided that
Employee reports such income and pays the applicable taxes, including the additional § 409A taxes, on a
timely filed 2008 Form 1040 (including a 2008 Form
1040 filed under extension, but not an amended 2008
Form 1040), and satisfies the applicable requirements
of § IV of this notice, Employee is not required to include any additional amounts deferred under the plan
in income under § 409A(a) or to include any amount
in income under § 409A for years before 2008, and
with respect to the $215 includible in income under
§ 409A is required to pay only the additional 20%
tax (or $42.50 in additional income tax), and not the
premium interest tax. Employer may also have paid
Employee only the $200 excess deferred amount if
the $15 in earnings on such amount were forfeited.

IV. INFORMATION AND
REPORTING REQUIREMENTS
A. Information Required with Respect
to Correction of an Operational Failure
in the Same Taxable Year as the Failure
Occurs
A service recipient described in § II
of this notice must attach to its timelyfiled (including extensions) original federal income tax return for its taxable year
in which the failure occurred a statement
entitled “§ 409A Relief under § II of Notice 2007–100” setting out the information required by § IV.A.1 of this notice,
and must provide to each service provider
affected by such failure a statement entitled “§ 409A Relief under § II of Notice
2007–100” setting out the information required by § IV.A.2 of this notice by no later
than the date (with extensions) on which
it is required to provide an information return (Form W–2 or 1099) to such service
provider for the calendar year in which
such failure occurred (or if no information
return is required for such service provider,
not later than the January 31 following the
calendar year in which such failure occurred). Notwithstanding the foregoing, to
qualify for the relief described in § II.E of
this notice (Correction of Exercise Price
of Otherwise Excluded Stock Rights), the

1250

service recipient is not required to provide
a statement to such service provider with
respect to such failure. In addition, each
taxpayer relying on the relief provided in
§ II of this notice must 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 (except in the case of a service provider for
whom a correction has been made under
§ II.E of this notice).
1. Attachment to Service Recipient Tax
Return for Failures Described in § II
The service recipient must attach a
statement to its federal income tax return
stating that it is relying upon § II of this
notice with respect to a correction of a
failure to comply with § 409A and setting
out the following information with respect
to each such failure:
a. The name and taxpayer identification number of each service provider
affected by the failure and whether such
service provider is an insider with respect
to the service recipient. Where the same or
a substantially similar operational failure
has occurred with respect to multiple service providers, the information required
in § IV.A.1.b through e of this notice
may be supplied only once with respect
to such operational failure, provided that
the identification of each service provider
affected by the operational failure in this
§ IV.A.1.a references such information
and the amount involved in the operational failure with respect to such service
provider.
b. Identification of the nonqualified deferred compensation plan with respect to
which such failure occurred.
c. A brief description of the failure and
the circumstances under which it occurred,
including the amount involved and date on
which the failure occurred.
d. A brief description of the steps taken
to correct the failure and the date on which
such correction was completed.
e. A statement that the operational failure is eligible for the correction under the
terms of this notice, and that the service recipient has taken all actions required, and
otherwise met all requirements, for such
correction.

December 26, 2007

2. Information to be Provided to Service
Provider for Failures Described in § II
The service recipient must provide
the following information to each service
provider affected by correction of a failure
to comply with § 409A who is entitled to
relief under § II of this notice (other than
§ II.E of this notice (Correction of Exercise Price of Otherwise Excluded Stock
Rights)) with respect to such failure:
a. A statement that the service provider
is entitled to the relief provided in § II
of this notice with respect to a failure to
comply with § 409A.
b.
The information described in
§ IV.A.1.b through e of this notice.
B. Information Required with Respect to
Transition Relief for Certain Operational
Failures Involving Limited Amounts
A service recipient described in § III.B
or III.C of this notice must attach to its
timely-filed (including extensions) original federal income tax return for its taxable year in which it discovers the failure
a statement entitled Ҥ 409A Relief under
§ III of Notice 2007–100” setting out the
information required by § IV.B.1 of this
notice and, not later than the date (with
extensions) on which it is required to provide an information return (Form W–2 or
1099) for the calendar year in which it discovers such failure 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 discovers such failure), must provide to
each such service provider a statement entitled “§ 409A Relief under § III of Notice 2007–100” setting out the information required by § IV.B.2 of this notice.
A service provider who is relying on the
relief provided in § III.B or III.C of this
notice with respect to a failure to comply with § 409A must attach to the service provider’s timely-filed (including extensions) original federal income tax return for the year in which such failure
was discovered the information required
by § IV.B.3 of this notice. In addition, each
taxpayer relying on the relief provided in
§ III of this notice must provide notice to
the examining agent upon the commencement of an examination of such taxpayer’s
federal tax return that the taxpayer was re-

December 26, 2007

lying upon the relief provided under this
notice for years covered by the examination.
1. Attachment to Service Recipient Tax
Return for Failures Described in § III.B
or III.C.
The service recipient must attach a
statement to its return setting out the following information with respect to each
failure described in § III.B. or III.C of this
notice:
a. The name and taxpayer identification number of each service provider
affected by the failure. Where the same or
a substantially similar operational failure
has occurred with respect to multiple service providers, the information required
in § IV.B.1.b through e of this notice
may be supplied only once with respect
to such operational failure, provided that
the identification of each service provider
affected by the operational failure in this
§ IV.B.1.a references such information
and the amount involved in the operational failure with respect to such service
provider.
b. Identification of the nonqualified deferred compensation plan with respect to
which such failure occurred.
c. A brief description of the failure and
the circumstances under which it occurred,
including the amount involved and date on
which the failure occurred.
d. A brief description of the steps taken
by the service recipient to avoid a recurrence of the failure, including the date on
which such steps were implemented.
e. A statement that the operational failure is eligible for the correction under the
terms of this notice, and that the service recipient has taken all actions required, and
otherwise met all requirements, for such
correction.
2. Information to be Provided to Service
Provider for Failures Described in § III.B
or III.C.
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
§ III.B or III.C of this notice with respect
to such failure:
a. A statement that the service provider
is entitled to the relief provided in § III.B

1251

or III.C of this notice (as applicable)
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 discovered.
b.
The information described in
§ IV.B.1.b through e of this notice.
3. Attachment to Service Provider Tax
Return for Failures Described in § III.B
or III.C.
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.
V. POTENTIAL PROGRAM TO
CORRECT CERTAIN FAILURES
TO COMPLY WITH § 409A(a) IN
OPERATION
The Treasury Department and the IRS
are considering establishing a corrections
program under which taxpayers could
correct certain failures to comply with
§ 409A(a) in the operation of a nonqualified deferred compensation plan (operational failures), including correction after
the end of the service provider’s taxable
year in which an operational failure occurs. The Treasury Department and the
IRS request comments on all aspects of
this potential program. For information
regarding the submission of comments,
see § VI of this notice.
The program under consideration
would cover failures that are not eligible
for the transition relief provided in § III of
this notice because the amount involved is
too large. The program may also provide
that the relief in § III for failures involving
small amounts would be available permanently. In addition, it is expected that
the program under consideration would,
in general, permit a service provider with
respect to whom an operational failure
occurred that is addressed by the program
but not eligible for the relief provided in
§ III of this notice, to include an amount in
income, and pay the additional taxes under
§ 409A with respect to, only the amount
involved in the operational failure, and not
other amounts deferred under the plan. For
example, if a service provider erroneously

2007–52 I.R.B.

deferred an additional $50,000 to a plan
under which the service provider had previously deferred $1,000,000 (for a total
of $1,050,000), and the $50,000 deferral
and the error were corrected pursuant to
the program, the service provider would
not be required to include in income under
§ 409A, and pay the additional § 409A
taxes with respect to, the $1,000,000 deferred under the plan that was not involved
in the operational failure.
The Treasury Department and the IRS
anticipate that the IRS would not issue
a ruling, enter into a closing agreement
or otherwise issue any formal approval
evidencing that participating taxpayers
had met the requirements of, and qualified for the relief available under, the
program. Rather, if the IRS examined
the relevant tax returns, the service recipient and service provider would have
the burden of demonstrating that the applicable requirements had been met. The
corrections program would be restricted
to service providers that at the time of the
correction are not under examination for
the year or years in which the operational
failure occurred, and would be limited
to operational failures that are corrected
promptly after discovery and in any case
within two years after the occurrence.
As part of the corrections program, the
service recipient and the service provider
would be required to satisfy information
and reporting requirements substantially
similar to those set forth in § IV.B of this
notice and the service recipient and service
provider would also be required to provide
notice to the examining agent upon the
commencement of an examination that the
taxpayer was relying upon the relief provided under the program for years covered
by the examination.
The Treasury Department and the IRS
anticipate that the program would include
the following limitations and requirements:

•

Relief would only be available with respect to an operational failure that has
occurred notwithstanding the service
recipient’s reasonable efforts to comply with the terms of the plan. Thus relief would only be available if the service recipient had established practices
and procedures reasonably designed to
ensure compliance with § 409A.

2007–52 I.R.B.

•

Relief would only be available with respect to an operational failure if the service recipient also took commercially
reasonable steps to avoid a recurrence
of the same type of operational failure.

•

Relief would also not be available
to correct an operational failure that
is egregious, intentional, or where
the failure is directly or indirectly related to participation in an abusive
tax avoidance transaction (meaning
for this purpose any listed transaction
under §1.6011–4(b)(2)).

•

If the operational failure involved an
accelerated payment that did not otherwise satisfy the plan’s terms and the
requirements of § 409A(a), the correction of the failure would require that
the service provider return to the service recipient the amount improperly
paid by the service provider to the service recipient. The service provider
would not be entitled to any loss or deduction for either the year of the repayment or the year to which the correction applied. However, if the plan does
not otherwise violate the provisions of
§ 409A and the applicable guidance,
the service provider would be required
thereafter to include in gross income
only additional amounts subsequently
paid from such plan (as if the amount
taken into gross income in the year of
the failure resulted in investment in the
contract with respect to the amount that
was actually included in gross income
for the year of the erroneous payment).

•

•

Relief would not be available for an
accelerated payment that did not otherwise satisfy the terms of the plan
and the requirements of § 409A(a) if
the service recipient made the payment
proximate to a financial downturn of
the service recipient or the service recipient experiencing any financial or
other issue that indicated a significant
risk that the service recipient would
not be able to pay the amount deferred
when the payment became due under
the plan.
If the operational failure involved an
amount that was improperly deferred
(for example, the deferral of salary
in excess of the applicable deferral
election under the terms of the plan),

1252

or an amount of deferred compensation that was not paid to the service
provider on the date applicable under
the terms of the plan, the correction
of the operational failure would require that the service recipient pay the
amount to the service provider. The
service provider would be required to
include the amount in gross income
in the service provider’s taxable year
in which the failure occurred and not
at the time the service recipient made
the corrective payment, with the service provider being required to report
the amount on an original or amended
return for such year and pay the appropriate tax thereon.

•

Investment earnings (potentially including losses) in accordance with the
terms of the plan for the period of time
after the operational failure through
the date of correction would be required to be taken into account.

•

In addition to the requirement of income inclusion described above, the
service provider would be required to
pay income taxes, including the additional § 409A taxes (and any applicable interest on the underpayment of
such § 409A taxes), as applicable. The
service recipient would be required to
file with the IRS and provide to the
service provider a Form W–2c or corrected Form 1099, as applicable. If the
service recipient and service provider
met the requirements for the correction
program, the service recipient would
not be liable for any failure to withhold
income taxes on the amount required to
be included in income under § 409A as
a result of the operational failure, to the
extent the amounts required to be included in income had not been paid or
made available to the service provider.

•

Some or all of the relief may be available only to service providers that are
not insiders with respect to the service
recipient.

VI. SUBMISSION OF COMMENTS
The Treasury Department and the IRS
are currently considering formulating general guidance on the correction of operational failures under a nonqualified deferred compensation plan resulting in a

December 26, 2007

failure to meet the requirements of § 409A.
Some of the guidance being considered has
been set forth in this notice. The Treasury Department and the IRS request comments on all aspects of a potential corrections program, including but not limited
to the topics addressed in this notice and
specifically request comments on the following:

•

•

With respect to the program under consideration described in § V of this notice, potential methods of tracking the
“investment in the contract” created
when an amount is included in income
under § 409A but not yet paid to the
service provider.
With respect to the program under consideration described in § V of this notice, potential methods of addressing
the service recipient’s deduction for
payments made, and the affect of repayments by the service provider to the
service recipient on such deductions.

Comments must be submitted by March
3, 2008. All materials submitted will be
available for public inspection and copying. Comments may be submitted to Internal Revenue Service, CC:PA:LPD:RU
(Notice 2007–100), 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
2007–100), Room 5203. Submissions
may also be sent electronically via the
internet to the following email address:
[email protected].
Include the notice number (Notice
2007–100) in the subject line.
VII. EFFECT ON OTHER
DOCUMENTS
For service recipients and service
providers who are entitled to relief under
this notice, Notice 2006–100, 2006–51
I.R.B. 1109 (relating to reporting and
wage withholding for 2006) and Notice
2007–89, 2007–46 I.R.B. 998 (relating to
reporting and wage withholding for 2007)
are modified to conform to the provisions
of this notice with respect to (i) the amount
that is required to be included in income by

December 26, 2007

a service provider under section 409A(a),
and (ii) the amount that is required to be
reported by the service recipient as an
amount includible in income under section
409A(a) on Form W–2, Box 1 and Box
12, using Code V, or Form 1099–MISC,
Box 7 and Box 15b, as applicable.
VIII. PAPERWORK REDUCTION
ACT
The collection of information contained
in this notice has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 USC. 3507) under control number 1545–2086.
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 section IV. 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.
IX. DRAFTING INFORMATION
The principal authors of this notice
are Stephen Tackney and Bill Schmidt
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
Stephen Tackney or Bill Schmidt at (202)
927–9639 (not a toll-free number).

1253

Update for Weighted Average
Interest Rates, Yield Curves,
and Segment Rates
Notice 2007–101
This notice provides guidance as to the
corporate bond weighted average interest
rate and the permissible range of interest
rates specified under § 412(b)(5)(B)(ii)(II)
of the Internal Revenue Code. It also
provides guidance on the corporate bond
monthly yield curve (and the corresponding spot segment rates), the 24-month average segment rates, and the funding transitional segment rates under § 430(h)(2).
In addition, this notice provides guidance
as to the interest rate on 30-year Treasury
securities under § 417(e)(3)(A)(ii)(II) as
in effect for plan years beginning before
2008, and the minimum present value segment rates under § 417(e)(3)(D) as in effect
for plan years beginning after 2007.
CORPORATE BOND WEIGHTED
AVERAGE INTEREST RATE
Sections
412(b)(5)(B)(ii)
and
412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004 and by
the Pension Protection Act of 2006 (PPA),
provide that the interest rates used to calculate current liability and to determine
the required contribution under § 412(l)
for plan years beginning in 2004 through
2007 must be within a permissible range
based on the weighted average of the rates
of interest on amounts invested conservatively in long term investment grade
corporate bonds during the 4-year period
ending on the last day before the beginning
of the plan year.
Notice 2004–34, 2004–1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate
and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the
monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining
the monthly composite corporate bond rate
as set forth in Notice 2004–34 continues to
apply in determining that rate. See Notice
2006–75, 2006–36 I.R.B. 366.
The composite corporate bond rate for
November 2007 is 6.14 percent. Pursuant

2007–52 I.R.B.