Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply With � 409A(a) in Operation

Relief and Guidance on
Corrections of Certain
Failures of a Nonqualified
Deferred Compensation Plan
to Comply With § 409A(a) in
Operation
Notice 2008–113
TABLE OF CONTENTS
I. Purpose
II. Background
III. Eligibility Requirements
A. In General
B. Avoidance of Recurrence of Operational Failures
C. Relief not Available to Service Providers Under Examination
D. Additional Eligibility Requirements
E. Required Repayments by the Service Provider
F. Eligibility for Relief for a Taxable Year in which the Service Recipient Experiences a Financial Downturn or Other
Financial Issue
G. Definition of Insider
H. Determining Certain Periods of Days
I. Adjustments for Earnings and Losses
J. References to the Internal Revenue Code
IV. Corrections of Certain Operational Failures in the Same Taxable Year as the Failure Occurs
A. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in the
Same Taxable Year as the Failure
B. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i)
Corrected in the Same Taxable Year as the Failure
C. Excess Deferred Amount Corrected in the Same Taxable Year
D. Correction of Exercise Price of Otherwise Excluded Stock Rights
V. Corrections of Certain Operational Failures Involving Non-Insider Service Providers in the Taxable Year Immediately
Following the Taxable Year in which the Failure Occurs
A. In General
B. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in the
Taxable Year Immediately Following the Failure
C. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i)
Corrected During Subsequent Taxable Year
D. Excess Deferred Amount Corrected in the Taxable Year Immediately Following the Year of the Failure
E. Correction of Exercise Price of Otherwise Excluded Stock Rights
VI. Relief for Certain Operational Failures Involving Limited Amounts
A. In General
B. Failure to Defer Limited Amount not Corrected in the Same Taxable Year and Certain Erroneous Payments of
Limited Amounts
C. Limited Excess Deferred Amount not Corrected in the Same Taxable Year
VII. Relief for Certain Other Operational Failures
A. General Requirements
B. Failure to Defer Amount not Corrected in the Same Taxable Year and Certain Erroneous Payments
C. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i)
not Corrected in the Same Taxable Year as the Failure
D. Excess Deferred Amount not Corrected in the Same Taxable Year
VIII. Special Transition Rule for Non-Insiders

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December 22, 2008

IX. Information and Reporting Requirements
A. Information Required with Respect to Correction of an Operational Failure in the Same Taxable Year as the Failure
Occurs
B. Information Required with Respect to Relief for Certain Operational Failures
X. Effect on Other Documents
XI. Request for Comments
XII. Paperwork Reduction Act
XIII. Drafting Information
I. PURPOSE
This notice provides procedures under
which taxpayers can obtain relief from the
full application of the income inclusion
and the additional taxes under § 409A with
respect to certain failures of a nonqualified deferred compensation plan to comply with § 409A(a) in operation (an operational failure), including:

•

•

•

•

Methods for correcting certain operational failures during the service
provider’s taxable year in which the
failure occurs and, for certain service
providers also during the subsequent
taxable year, to avoid income inclusion under § 409A(a).
Relief limiting the amount includible
in income under § 409A(a) for certain operational failures during a service provider’s taxable year that involve only limited amounts.
Relief limiting the amount includible
in income under § 409A(a) for certain operational failures regardless of
whether the failure involves only limited amounts, but subject to further required actions to correct the failure.
Special transition relief for certain operational failures occurring before January 1, 2008.

Comments are also requested on
whether procedures for the correction of a
failure of a plan to comply with the plan
document requirements of §1.409A–1(c)
should be adopted. See § XI of this notice.
II. BACKGROUND
On December 3, 2007, the Treasury
Department and the IRS issued Notice
2007–100, 2007–52 I.R.B. 1243, setting
forth guidance permitting the correction

of certain operational failures, and providing transition relief limiting the amount
includible in income under § 409A(a)
for certain operational failures involving
limited amounts. Notice 2007–100 also
described potential guidance that would
limit the amount includible in income
under § 409A(a) for certain operational
failures involving amounts that exceeded
the limit. Comments were requested with
respect to all aspects of the notice. The
Treasury Department and the IRS have
reviewed all of the comments submitted,
and are issuing this notice as a successor
to Notice 2007–100. This notice incorporates, clarifies and expands upon the
guidance provided in Notice 2007–100,
and accordingly Notice 2007–100 is obsoleted. For further information, see § X of
this notice.
III. ELIGIBILITY REQUIREMENTS
A. In General
A taxpayer is not eligible for the relief
provided in §§ IV through VIII of this notice unless all of the applicable requirements of this § III are met, as well as the
requirements of the particular section providing the applicable relief and the notice
and the reporting requirements of § IX. 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 notice have
been met. Any application of the relief
provided in this notice is subject to examination by the IRS.
B. Avoidance of Recurrence of
Operational Failure
The relief provided under §§ IV through
VIII of this notice is not available unless,

in addition to meeting the applicable requirements of the relevant section, 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, 2009, unless
the service recipient or service provider
demonstrates that the service recipient had
established practices and procedures reasonably designed to ensure that such an
operational failure would not recur and
had taken commercially reasonable steps
to avoid a recurrence of the operational
failure and that the operational failure occurred despite the service recipient’s diligent efforts.
C. Relief not Available to Service
Providers Under Examination
The relief provided in §§ V through
VIII is not available if a federal income
tax return of the relevant service provider
for the service provider’s taxable year in
which the operational 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.
D. Additional Eligibility Requirements
Sections IV through VIII of this notice
do not provide relief for plan terms and
provisions that fail to meet the requirements of § 409A or for operational failures
that are not described in those sections.1
The Treasury Department and the IRS are

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, 2006–2 C.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 operational failures occurring in taxable years beginning before January 1, 2009.

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2008–51 I.R.B.

requesting comments as to whether an additional program to address plan document
failures would be feasible and advisable
(see § XI of this notice). In addition, relief
is not available under §§ IV through VIII
of this notice with respect to any exercise
of a stock right that otherwise would result
in a failure to comply with § 409A. Relief
otherwise available under §§ IV through
VIII of this notice is conditioned upon the
timely filing and providing of the information required by § IX of this notice. The
relief provided by §§ IV through VIII of
this notice applies only to operational failures that are inadvertent and unintentional.
For this purpose, an inadvertent and unintentional operational failure means a failure to comply with plan provisions that satisfy the requirements of § 409A(a), or an
inadvertent unintentional failure to follow
the requirements of § 409A(a) in practice,
due to one or more inadvertent and unintentional errors in the operation of the plan.
In addition, the relief provided in this section is not available if the failure is directly
or indirectly related to participation in any
listed transaction under §1.6011–4(b)(2)).
E. Required Repayments by the Service
Provider
If to qualify for any applicable relief a
service provider is required to repay to the
service recipient an amount erroneously
paid or made available to the service
provider, such as required in §§ IV.A,
IV.B, V.B, V.C, VII.B and VII.C, the
amount erroneously paid or made available to the service provider refers to the
gross amount paid to, or on behalf of, the
service provider, before the application
of any withholding requirements such as
the Federal employment tax withholding
requirements. 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 applicable deadline. Alternatively, in lieu of
such repayment, the service recipient may
reduce the service provider’s compensation that otherwise would have been paid
on or before such applicable deadline by
an equivalent amount. To the extent that,
in lieu of repayment, the service recipient

2008–51 I.R.B.

reduces other compensation that would
have been paid to the service provider, the
other compensation that would have been
paid to the service provider, but instead
is used to repay the erroneous payment
or interest (if applicable), is includible in
income (and wages if the service provider
is an employee).
The amount will not be treated as repaid 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.
F. Eligibility for Relief for a Taxable
Year in which the Service Recipient
Experiences a Financial Downturn or
Other Financial Issue
The relief provided in §§ IV through
VIII is not available with respect to any
erroneous payment occurring during any
taxable year of the service provider in
which the service recipient experiences a
substantial financial downturn, or otherwise experiences financial or other issues,
if such downturn or other issue indicates
a significant risk that the service recipient
will not be able to pay the amount deferred
when the payment becomes due.
G. Definition of Insider
Certain sections of this notice provide
additional eligibility requirements for relief, or do not provide relief, if the affected service provider is an insider with
respect to a service recipient. 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% 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)

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(officer). In the case of a service recipient
that is not a corporation, such rules are
applied by analogy.
H. Determining Certain Periods of Days
To apply the requirements of certain
sections of this notice, a period of days
must be calculated and applied. For example, the number of days that a service
provider retained amounts erroneously
paid to the service provider may be required to be calculated. For purposes of
counting days under this notice, the first
day of the period is disregarded and the
last day is taken into account. For example, if on June 1, 2009, a service recipient
erroneously paid a service provider an
amount that the service provider repaid
on June 30, 2009, there would be 29 days
from the date of payment through the
date of repayment. If the period of days
required to be calculated ends upon the
service provider’s repayment, and the 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.
I. Adjustments for Earnings and Losses
The relief provided in certain sections
of this notice permits or requires that deferred amounts be adjusted to reflect earnings and losses, provided that such adjustments must be made by a specified deadline. If it is impracticable to make the adjustment by the applicable deadline, the
adjustment will be treated as made if, on
or before the applicable deadline, the service provider (in the case of earnings) or
the service recipient (in the case of losses)
has a legally binding right to have such adjustment made.
J. References to the Internal Revenue
Code
For purposes of this notice, references
to sections of the Internal Revenue Code
include references to any applicable guidance thereunder.
IV. CORRECTIONS OF CERTAIN
OPERATIONAL FAILURES IN THE
SAME TAXABLE YEAR AS THE
FAILURE OCCURS

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A. Failure to Defer Amount or Incorrect
Payment of Amount Payable in a
Subsequent Taxable Year Corrected in the
Same Taxable Year as the Failure
1. Relief for Amounts to which § IV.A
Applies
This § IV.A applies if during a service
provider’s taxable year an operational failure occurs that is described in § IV.A.2(a)
and the requirements of § IV.A.2(b)
through (d) and § IV.A.4 are met. An
amount to which this § IV.A 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).
2. Amounts to which § IV.A Applies
(a) A failure is described in this
§ IV.A.2(a) if an amount of nonqualified deferred compensation that, under
the terms of the plan and any applicable deferral election, and § 409A, should
not have been paid or made available
to a service provider in a taxable year
of the service provider, was erroneously
paid or made available to the service
provider in that year, other than a payment that fails to meet the requirements of
§ 409A(a)(2)(B)(i) (requirement to delay
for six months payments to a specified
employee upon separation from service).
For rules relating to correction of certain
payments that fail to meet the requirements of § 409A(a)(2)(B)(i), see § IV.B of
this notice.
(b) 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. If the service provider
was not an insider (as defined in § III.G)
at any time during the taxable year in
which such amount was erroneously paid
or made available, and if repayment of
such amount would cause an immediate
and heavy financial need as defined in
§1.401(k)–1(d)(3)(iii), in lieu of immediate repayment the service recipient and the
service provider may enter into a legally
binding agreement to have such amounts
repaid over a specified period that ends
not later than 24 months from the due date

December 22, 2008

(without extensions) for the federal income tax return for the service provider’s
taxable year during which the amount was
erroneously paid or made available to the
service provider, provided that the service
provider must also pay interest on the
amount repaid to the service recipient. For
this purpose, the interest rate must be no
less than the short-term applicable Federal
rate (AFR) under § 1274(d)(1), based on
annual compounding, for the month in
which the erroneous payment was paid
or made available. If the amount paid or
withheld on a repayment date is less than
the entire erroneous payment, for each
repayment date the interest calculation is
applied by substituting the unpaid balance
immediately before the repayment for the
amount of the erroneous payment. The
repayment requirement of this § IV.A.2(b)
will not be met unless all payments (including interest) are made by the end of
the period specified in such agreement.
(c) Immediately after such repayment (or agreement to repay) 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.
(d) If the total of all amounts to which
this § IV.A 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 was an
insider (as defined in § III.G of this notice)
with respect to the service recipient at any
time during the taxable year in which the
erroneous payment was made, the service
provider pays 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 an interest rate that
is no less than 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

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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. If the amount paid or
withheld on a repayment date is less than
the entire erroneous payment, for each
repayment date the interest calculation is
applied by substituting the unpaid balance
immediately before the repayment for the
amount of the erroneous payment. For
rules regarding the counting of days, see
§ III.H of this notice.
3. Reporting and Withholding
Requirements
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 and would not otherwise have been
due absent such payment, appropriate adjustments should be made in accordance
with 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
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.
4. Adjustments for Earnings
For purposes of this § IV.A, 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

2008–51 I.R.B.

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.
5. Examples
In each of the following examples, it
is assumed that Employee is an individual
whose taxable year is the calendar year and
Employee and Employer both satisfy the
applicable requirements of §§ III and IX
of this notice.
Example 1: Employee, who is not an insider with
respect to Employer, makes a timely election to defer 50% of a bonus payable in 2009 pursuant to an
account balance plan maintained by Employer. The
bonus is $100,000. Employer erroneously defers only
10% of the bonus, or $10,000, and pays Employee
the other $90,000 in 2009 (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, 2009,
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 as income by Employer on Form W–2. Alternatively, in lieu of the $40,000 repayment by Employee to Employer, compensation otherwise payable
to Employee in 2009 (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 2009 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, 2009. For example,
if the original $10,000 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: 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, 2010,
pursuant to an account balance plan maintained by
Employer. Employer erroneously defers only 10%

2008–51 I.R.B.

of the bonus, or $10,000, and pays Employee the
other $90,000 (including $70,000 that should have
been deferred) on July 1, 2010. Assume for purposes
of this example that the short-term AFR, based on
annual compounding, for July 2010 is 4.0%. Employer notifies Employee of the error and Employee
pays Employer $70,705.75 on October 1, 2010,
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 2010 and Employee is an
insider). The $70,000 is not required to be included
in income by Employee or reported as income 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
2010 (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 applicable interest (but not
the erroneous $70,000 payment) must be reported by
Employer as wages on the 2010 Form W–2 issued
to Employee and included in Employee’s income for
2010. 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, 2010. Employer must include
in income any interest paid to Employer.

B. Incorrect Payment of Amount Payable
in Same Taxable Year or Incorrect
Payment in Violation of § 409A(a)(2)(B)(i)
Corrected in the Same Taxable Year as
the Failure
1. Relief for Amounts to which § IV.B
Applies
With respect to an amount to which this
§ IV.B applies, the service provider will
not be treated as having failed to comply
with § 409A(a)(2)(B)(i) (if applicable) 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.
2. Amounts to which § IV.B Applies
This § IV.B applies if during a service
provider’s taxable year an operational failure occurs that is described in § IV.B.2(a)
and the requirements of § IV.B.2(b) and
§ IV.B.4 are met.
(a) A failure is described in this
§ IV.B.2(a) if an amount of nonqualified deferred compensation that, under
the terms of the plan and any applicable deferral election, should not have
been paid or made available to a service

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provider until a later date in the same taxable year, was erroneously paid or made
available to the service provider more than
30 days before such later due date, or an
amount 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, (i) would
have been payable during the six months
following the service provider’s separation from service if the service provider
had not been a specified employee, (ii)
because the service provider was a specified employee the amount should not have
been paid or made available to a service
provider within the six months after the
service provider’s separation from service,
and (iii) such amount was erroneously paid
or made available to the service provider
during such six-month period.
(b) 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, and immediately after such repayment the service provider has a legally
binding right to receive such amount from
the service recipient on the date that (i) if
the repayment is made on or before the
date the amount would otherwise have
been payable under the terms of the plan
and the applicable deferral election, is
the same number of days after the date
the amount would otherwise have been
payable 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 (ii) if the repayment is made
after the date the amount would otherwise
have been payable under the terms of the
plan and the applicable deferral election,
is the same number of days after the date
the amount is repaid as the number of
days from the date the service recipient
made the erroneous payment to the service provider through the date the amount
would otherwise have been payable under
the terms of the plan and the applicable
deferral election. For rules regarding the
counting of days, see § III.H of this notice.

December 22, 2008

3. Reporting and Withholding
Requirements
If the requirements of this § IV.B 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, and would not otherwise have been
due absent 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.
4. Adjustment for Earnings
For purposes of this § IV.B, the service provider’s account balance or other
amount of deferred compensation under
the plan may not be adjusted for earnings,
but may be adjusted for losses, retroactive to the date the amount was erroneously
paid or made available, provided that such
adjustment must be made on or before the
applicable deadline for repayment.
5. Examples
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),
and Specified Employee and Employer
both satisfy the applicable requirements of
§§ III and IX of this notice.
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 December 15, 2008, so that the payment
is due on July 1, 2009. Employer erroneously pays
Specified Employee the amount of deferred compensation on March 1, 2009 (122 days before the original
payment due date). Employer discovers the error on

December 22, 2008

May 1, 2009, and Specified Employee repays the
amount to Employer on June 1, 2009 (92 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 October 1, 2009 (92 days after the July 1,
2009 original payment due 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 as a lump sum
payment December 1, 2009 (and so not subject to the
six-month delay requirement of § 409A(a)(2)(B)(i)).
Employer erroneously pays Specified Employee
the amount of deferred compensation on September
1, 2009 (91 days early). Employer discovers the
error and Specified Employee repays the amount
to Employer on November 1, 2009 (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, 2010 (61 days after the
original payment due 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 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 as income on the 2009
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, and
is required to be reported as income on that year’s
Form W–2 and subject to applicable income taxes.

C. Excess Deferred Amount Corrected in
the Same Taxable Year
1. Relief for Amounts to which § IV.C
Applies
An excess amount to which this § IV.C
applies is not treated as an amount deferred
under the plan.
2. Amounts to which § IV.C Applies
This § IV.C applies if during a service
provider’s taxable year an operational failure occurs that is described in §§ IV.C.2(a)
and the requirements of § IV.C.2(b) and (c)
and § IV.C.3 are met.
(a) A failure is described in this
§ IV.C.2(a) if, under the terms of a plan
and an applicable deferral election, and
§ 409A, an amount that should not have
been deferred compensation under the
plan is erroneously credited to the service
provider’s account or otherwise treated

1310

as deferred compensation under 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 under the plan. However,
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 is not a failure described
in this § IV.C.2(a), but see § 1.409A–3(d)
for certain circumstances under which
such payments may be treated as made
in accordance with a designated payment
date.
(b) 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.
(c) The amount to which the service
provider has a legally binding right under
the plan at the end of the year is adjusted to
reflect the payment (for example, through
a reduction in the account balance). 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 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.
3. Adjustment for Earnings
If the service provider was an insider
with respect to the service recipient (as
defined in § III.G of this notice) at any
time during the service provider’s taxable
year during which the failure occurred,
the remaining account balance (or other
deferred compensation under the plan) is
adjusted for 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. If the service provider was not an

2008–51 I.R.B.

insider, such adjustment may be made (but
is not required). If 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.
4. Example
In the following example, it is assumed
that Employee is an individual whose taxable year is the calendar year and Employee and Employer both satisfy the applicable requirements of §§ III and IX of
this notice.
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 2008. The bonus is $100,000. Employer
erroneously 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, 2008, Employer pays Employee $40,000 of the account balance under the plan.
The remaining account balance must be adjusted for
earnings and may be adjusted for losses that were allocable to such amount under the plan. 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, 2008.

D. Correction of Exercise Price of
Otherwise Excluded Stock Rights
1. Relief for Amounts to which § IV.D
Applies
If this § IV.D applies to a stock right, the
stock right is treated from the date of grant
as not providing for a deferral of compensation for purposes of § 409A.

for a deferral of 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 erroneously established at less than the
fair market value of the underlying stock
on the date of grant.
(b) Before the stock right is exercised
and not later than the last day of the 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 not less than the fair market
value of the underlying stock on the date
of grant.
3. Example
In the following example, it is assumed
that Employee is an individual whose taxable year is the calendar year and Employee and Employer both satisfy the applicable requirements of §§ III and IX of
this notice.
Example: On January 1, 2009, Employer grants
Employee a stock option to purchase 100 shares of
stock, and the stock option otherwise would not provide for a deferral of compensation for purposes of
§ 409A except that due to an error the exercise price
is set at an amount below the fair market value of
the stock on January 1, 2009. On July 1, 2009, Employee partially exercises the stock option and purchases 40 shares, but retains a stock option to purchase 60 shares. Provided that before the earlier of
January 1, 2009 or the exercise of the remaining stock
option to purchase 60 shares, the exercise price of the
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, 2009, the stock option to purchase 60
shares may qualify for the relief provided in this section. Because the exercise price was not reset before
the exercise on July 1, 2009, the portion of the stock
option that was exercised to purchase 40 shares is not
eligible for the relief provided in this section.

V. CORRECTIONS OF CERTAIN
OPERATIONAL FAILURES
INVOLVING NON-INSIDER
SERVICE PROVIDERS IN THE
TAXABLE YEAR IMMEDIATELY
FOLLOWING THE TAXABLE YEAR
IN WHICH THE FAILURE OCCURS

2. Amounts to which § IV.D Applies
This § IV.D applies if during a service
provider’s taxable year a failure occurs that
is described in § IV.D.2(a) and the requirements of § IV.D.2(b) are met.
(a) A failure is described in this
§ IV.D.2(a) if, under the terms of a stock
right, the stock right would not provide

2008–51 I.R.B.

A. In General
The relief provided in this § V is available only with respect to service providers
that are not insiders as defined in § III.G
of this notice at any time during the service
provider’s taxable year in which the operational failure occurs, or at any time during

1311

the immediately following taxable year.
The relief is available with respect to such
service providers regardless of whether the
same or a substantially similar failure occurred with respect to a service provider
that is an insider, but in no case is the relief
available with respect to a service provider
that is an insider at any time during either taxable year. For example, if an operational failure under an arrangement results in two erroneous $10,000 payments,
one to a service provider that is an insider
and one to a service provider that is not
an insider, the relief provided in this § V
may be available with respect to the service provider that is not an insider (provided that all other requirements are met),
but is not available with respect to the service provider that is an insider. The relief
provided in this § V may be available regardless of whether relief is also available
under § VI or VII of this notice, so that the
relief provided in this section may be utilized in lieu of the relief otherwise available under § VI or VII of this notice.
B. Failure to Defer Amount or Incorrect
Payment of Amount Payable in a
Subsequent Taxable Year Corrected in the
Taxable Year Immediately Following the
Failure
1. Relief for Amounts to which § V.B
Applies
An amount to which this § V.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).
2. Amounts to which § V.B Applies
This § V.B applies if during a service
provider’s taxable year an operational failure that is described in § V.B.2(a) occurs
and the requirements of § V.B.2(b) through
(d) and §§ V.B.3 and 4 are met.
(a) A failure is described in this
§ V.B.2(a) if an amount of nonqualified
deferred compensation that, under the
terms of the plan and any applicable deferral election, and § 409A, should not have
been paid or made available to a service
provider in a taxable year of the service
provider, erroneously was paid or made
available in that year, and such payment is

December 22, 2008

not a payment that fails to meet the requirements of § 409A(a)(2)(B)(i) (requirement
to delay for six months payments to a
specified employee upon separation from
service).
(b) The service provider repays to the
service recipient the amount that was erroneously paid or made available to the service provider during the service provider’s
taxable year immediately following the
taxable year in which such amount was
erroneously paid or made available. If
repayment of such amount would cause
an immediate and heavy financial need
as defined in §1.401(k)–1(d)(3)(iii), the
service recipient and the service provider
may enter into a legally binding agreement to have such amounts repaid over a
specified period that ends not later than 24
months from the due date (without extensions) for the federal income tax return for
the service provider’s taxable year during
which the amount was erroneously paid
or made available to the service provider.
However, the repayment requirement of
this § V.B.2(b) will not be met unless all
payments are made by the end of the period specified in such agreement. If the
amount erroneously paid or made available to the service provider is otherwise
payable under the terms of the plan during the subsequent taxable year during
which repayment would be required under
this § V.B.2(b), no repayment is required.
However, the service provider must pay
the interest payment set forth in § V.B.2(d)
below assuming that the first date during
the subsequent taxable year at which the
amount otherwise could have been paid in
compliance with the plan terms is the date
of repayment.
(c) Immediately after such repayment (or agreement to repay), 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.
(d) The service provider pays interest
to the service recipient at the time the service provider repays the amount to the ser2

vice recipient with interest at a rate not less
than the short-term applicable Federal rate
(AFR) under § 1274(d)(1), based on annual compounding, for the month in which
the erroneous payment was paid or made
available, compounded as of the end of the
service provider’s taxable year. For this
purpose, the interest rate is the short-term
AFR for the month in which the erroneous
payment was paid or made available. If the
amount paid on a repayment date is less
than the entire erroneous payment, for each
repayment date the interest calculation is
applied by substituting the unpaid balance
immediately before the repayment for the
amount of the erroneous payment.
3. Reporting and Withholding
Requirements
The amount erroneously paid to the service provider that is repaid by the service
provider to the service recipient is required
to be included in income by the service
provider, and reported as income to the
service provider on a Form W–2 or Form
1099 by the service recipient, for the year
in which the erroneous payment is made.
As part of the relief provided by this section, the service provider is permitted to
take a deduction in determining adjusted
gross income equal to the repayment to the
service recipient (but not including any interest payment), but is required to include
the subsequent payment in income (and the
service recipient is required to report the
amount as income on Form W–2 or Form
1099). 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 that would have been paid to the
service provider but that 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, with respect to the amount repaid (excluding any interest payment), the service
provider is permitted to take a deduction in
determining adjusted gross income for the
amount of the repayment.
4. Adjustment for Earnings
For purposes of this § V.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 the taxable year in which the repayment is made.
5. Example
In the following example, it is assumed
that Employee is an individual whose taxable year is the calendar year, at all relevant times Employee is not an insider as
defined in § III.G of this notice, and Employee and Employer both satisfy the applicable requirements of §§ III and IX of
this notice.
Example: Employee makes a timely election to
defer 20% of a $100,000 bonus payable on July 1,
2010, pursuant to an account balance plan maintained
by Employer. Employer erroneously defers only 10%
of the bonus, or $10,000, and pays Employee the
other $90,000 (including $10,000 that should have
been deferred) on July 1, 2010. Assume for purposes
of this example that the short-term AFR for July 2010
is 4.0%. Employer notifies Employee of the error
and Employee pays Employer $10,505.73 on October 1, 2011, consisting of the $10,000 erroneous payment plus $505.73 interest.2 The deferral is treated as
made in accordance with the terms of the plan under
this § V.B. For 2010, the $10,000 payment is required
to be included in income by Employee and reported
as wages by Employer on the 2010 Form W–2. For
2011, Employee may take a deduction with respect to
the $10,000 repayment in determining adjusted gross
income, but may not deduct the interest payment. Alternatively, in lieu of the $10,505.73 payment by Employee to Employer, compensation otherwise payable
to Employee in 2011 (such as salary payments) may
be reduced by $10,000 plus applicable interest, in
which case the reduction in Employee’s compensation used to repay the amount plus applicable interest
must be reported by Employer as wages on the 2011
Form W–2 issued to Employee and included in Employee’s income for 2011. In such a case, Employee
may take a deduction with respect to the $10,000 repayment in determining adjusted gross income, but
may not deduct the interest payment. 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,
2011.

Interest during 2010 = ($10,000 x (183/365) x 4.0%) = $200.55. Interest during 2011 = ($10,200.55 x (273/365) x 4.0%) = $305.18. Total interest = $200.55 + $305.18 = $505.73.

December 22, 2008

1312

2008–51 I.R.B.

C. Incorrect Payment of Amount Payable
in Same Taxable Year or Incorrect
Payment in Violation of § 409A(a)(2)(B)(i)
Corrected During Subsequent Taxable
Year
1. Relief for Amounts to which § V.C
Applies
With respect to an amount to which this
§ V.C applies, the service provider will
not be treated as having failed to comply
with § 409A(a)(2)(B)(i) (if applicable) and
the terms of the plan and any applicable
deferral election as a result of the amount
being paid or made available as described
in § V.C.2(a) of this notice.
2. Amounts to which § V.C Applies
This § V.C applies if during a service
provider’s taxable year an operational failure occurs that is described in § V.C.2(a)
and the requirements of § V.C.2(b) and (c)
and §§ V.C.3 and 4 are met.
(a) A failure is described in this
§ V.C.2(a) if an amount of nonqualified
deferred compensation that, under the
terms of the plan and any applicable deferral election, should not have been paid or
made available to a service provider until
a later date in the same taxable year, was
erroneously paid or made available to the
service provider during such taxable year
but more than 30 days before such later
due date, or an amount 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), (i) would have been payable
during the six months following the service provider’s separation from service if
the service provider had not been a specified employee, (ii) because the service
provider was a specified employee the
amounts should not have been paid or
made available to a service provider within
six months after the service provider’s separation from service, and (iii) such amount
was erroneously paid or made available to
the service provider before the expiration
of such six-month period.
(b) On or before the last day of the
service provider’s taxable year immediately following the taxable year in which
the amount was paid or made available,
the service provider repays to the service

2008–51 I.R.B.

recipient the amount that was erroneously
paid or made available to the service
provider.
(c) 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 date the amount is
repaid as the number of days from the date
the service recipient made the erroneous
payment to the service provider through
the date the amount would otherwise have
been payable under the terms of the plan
and the applicable deferral election. For
rules regarding the counting of days, see
§ III.H of this notice.
3. Reporting and Withholding
Requirements
If the requirements of this § V.C are
met, the original payment from the service
recipient to the service provider that has
been repaid to the service recipient is required to be reported as income on Form
W–2 or Form 1099, as applicable. If the
repayment by the service provider to the
service recipient and the subsequent payment from the service recipient to the service provider both occur within the same
taxable year of the service provider, the
service provider is not permitted to deduct
the repayment, but also is not required to
include the subsequent payment in income
(and the service recipient is not required to
report the amount as income on Form W–2
or Form 1099). As part of the relief provided in this section, if the repayment by
the service provider to the service recipient and the subsequent payment from the
service recipient to the service provider do
not occur within the same taxable year of
the service provider, the service provider
is permitted a deduction in determining adjusted gross income equal to the amount of
the repayment, but is required to include
the subsequent payment in income (and the
service recipient is required to report the
amount as income on Form W–2 or Form
1099). 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 that would have been paid to the service provider, but instead is used to repay
the erroneous payment is includible in income (and wages if the service provider is
an employee); however, with respect to the

1313

amount repaid, the service provider is permitted a deduction in determining adjusted
gross income equal to the amount of the repayment.
4. Adjustment for Earnings
For purposes of this § V.C, the service provider’s account balance or other
amount of deferred compensation under
the plan may not be adjusted for earnings,
but may be adjusted for losses, retroactive to the date the amount was erroneously
paid or made available, provided that such
adjustment must be made on or before the
applicable deadline for repayment.
5. Example
In the following example, it is assumed
that Employee is an individual whose taxable year is the calendar year, Employee is
not an insider as defined in § III.G of this
notice at all relevant times, and Employee
and Employer both satisfy the applicable
requirements of §§ III and IX of this notice.
Example: Under a nonqualified deferred compensation plan sponsored by Employer, Employee has a
legally binding right to a payment of deferred compensation on the specified date of July 1, 2009. Employer erroneously pays Employee the amount of deferred compensation on May 1, 2009 (61 days before
the original payment due date). Employer discovers
the error on August 1, 2010, and Employee repays
the amount to Employer on August 1, 2010. Provided
that immediately after such repayment Employee has
a legally binding right to receive the amount from
Employer on October 1, 2010 (61 days after the August 1, 2010 repayment date) and Employer does not
repay the amount to Employee before that date, Employee will not be treated as having failed to comply
with the terms of the plan and the applicable deferral
election solely as a result of the early payment.

D. Excess Deferred Amount Corrected in
the Taxable Year Immediately Following
the Year of the Failure
1. Relief for Amounts to which § V.D
Applies
An excess amount to which this § V.D
applies is not treated as an amount deferred
under the plan.
2. Amounts to which § V.D. Applies
This § V.D applies if during a service
provider’s taxable year an operational failure occurs that is described in § V.D.2(a)
and the requirements of § V.D.2(b) through
(d) and § V.D.3 are met.

December 22, 2008

(a) A failure is described in this
§ V.D.2(a) if, under the terms of a plan
and an applicable deferral election, and
§ 409A, an amount that should not have
been deferred compensation under the
plan is erroneously credited to the service
provider’s account or otherwise treated
as deferred compensation under 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 under the plan.
(b) The excess amount is paid to the service provider during the service provider’s
taxable year immediately following the
taxable year in which the excess amount
was incorrectly treated as deferred compensation.
(c) The amount to which the service
provider has a legally binding right under
the plan at the end of such immediately following taxable year is adjusted to reflect
the payment (for example, through a reduction in the account balance).
(d) The service recipient does not pay
interest to (or otherwise compensate) the
service provider to reflect the time value
of money with respect to the late payment.
3. Adjustment for Earnings
The remaining account balance (or
other deferred compensation under the
plan) must be adjusted for earnings and
may be adjusted for 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
following the year in which such amount
was incorrectly treated as deferred compensation under the plan.
4. Example
In the following example, it is assumed
that Employee is an individual whose taxable year is the calendar year, at all relevant times Employee is not an insider as
defined in § III.G of this notice, and Employee and Employer both satisfy the applicable requirements of §§ III and IX of
this notice.

December 22, 2008

Example: Employee makes a timely election
pursuant to an account balance plan to defer 10%
of a bonus otherwise payable in 2010. The bonus
is $100,000. Employer erroneously defers 20% of
the bonus, or $20,000, and pays Employee $80,000
(instead of deferring $10,000 and paying Employee
$90,000). Employer pays Employee $10,000 of the
account balance under the plan on July 1, 2011. Provided that Employee includes in income the $10,000
payment in 2011, Employee is not required to include
any amount in income under § 409A. The remaining
account balance must be adjusted for earnings and
may be adjusted for losses that were allocable to such
$10,000 amount under the plan. However, Employer
may not pay Employee interest on the $10,000 erroneous deferral or otherwise compensate Employee
for the loss of the use of such funds.

E. Correction of Exercise Price of
Otherwise Excluded Stock Rights
1. Relief for Amounts to which § V.E
Applies
If this § V.E 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.
2. Amounts to which § V.E. Applies
This § V.E applies if during a service
provider’s taxable year a failure occurs that
is described in § V.E.2(a) and the requirements of § V.E.2(b) are met.
(a) A failure is described in this
§ V.E.2(a) if, under the terms of a stock
right, the stock right would not provide
for a deferral of 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 erroneously established at less than the
fair market value of the underlying stock
on the date of grant.
(b) Before the stock right is exercised
and not later than the last day of the service
provider’s taxable year immediately following the 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 a deferral of compensation for purposes of § 409A.

1314

3. Example
In the following example, it is assumed
that Employee is an individual whose taxable year is the calendar year, Employee is
not an insider as defined in § III.G of this
notice at all relevant times, and Employee
and Employer both satisfy the applicable
requirements of §§ III and IX of this notice.
Example. On January 1, 2009, Employer grants
Employee a stock option to purchase 100 shares of
stock, and the stock option otherwise would not provide for a deferral of compensation under § 409A
except that due to an administrative error the exercise price is set at an amount below the fair market
value of the stock on January 1, 2009. On July 1,
2010, Employee partially exercises the stock option
and purchases 40 shares, but retains a stock option to
purchase 60 shares. Provided that before the later of
January 1, 2011 or the date the remaining stock option to purchase 60 shares is exercised, the exercise
price of the 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, 2009, the stock option
to purchase 60 shares may qualify for the relief provided in this section. Because the exercise price was
not reset before the July 1, 2010 exercise, the portion
of the stock option that was exercised to purchase 40
shares is not eligible for the relief provided in this section.

VI. RELIEF FOR CERTAIN
OPERATIONAL FAILURES
INVOLVING LIMITED AMOUNTS
A. In General
If an operational failure to comply with
§ 409A(a) occurs, but the operational failure qualifies for the relief provided in this
§ VI and the taxpayer meets the requirements of this § VI, 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. The relief provided by this section
is not available with respect to any failure unless all of the requirements of this
section (including any applicable requirement to file an original or amended return,
but not including the requirements of § IX
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. The relief provided in
this section is available even if additional
relief would otherwise be available under
§ V or § VII of this notice if certain further actions were taken, so that the relief

2008–51 I.R.B.

provided in this section may be utilized in
lieu of the relief otherwise available under
§ V or § VII of this notice.
B. Failure to Defer Limited Amount not
Corrected in the Same Taxable Year and
Certain Erroneous Payments of Limited
Amounts
1. Relief for Amounts to which § VI.B
Applies
With respect to an amount to which
§ VI.B applies, the amount includible in
income under § 409A(a) as a result of a
payment described in § VI.B.2(a) 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).
2. Amounts to which § VI.B Applies
This § VI.B applies if during a service
provider’s taxable year an operational failure occurs that is described in § IV.B.2(a)
and the requirements of § IV.B.2(b) and (c)
and § VI.B.3 are met.
(a) A failure is described in this
§ IV.B.2(a) if an amount should have been
treated as deferred compensation under
the terms of the plan and any applicable
deferral election, and § 409A, but the
amount was not credited 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, and 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. For purposes of

2008–51 I.R.B.

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 (a) under the terms
of the plan and § 409A(a)(2)(B)(i) is required to be delayed for at least six months
following a separation from service, but is
paid within that six-month-period, or (b)
is paid in the same taxable year in which
the amount was payable under the plan,
but more than 30 days before such due
date, may be treated as the payment of an
amount that should have continued to be
deferred compensation.
(b) Sections IV.A, IV.B, V.B, V.C, VII.B
and VII.C of this notice do not apply because relief is not available under such sections with respect to the failure, the failure
is not corrected under such sections, or otherwise.
(c) 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. 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 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.
3. Reporting and Filing Requirements
The service recipient must report such
payment on a Form W–2 (or Form W–2c)
or Form 1099 (or corrected Form 1099), as
applicable, as an amount includible in income under § 409A for the year in which
the payment was made, including reporting such amount on a Form W–2, Box 12
using Code Z, if applicable. The service
provider must include such amount in income on and pay the additional taxes under
§ 409A as described in this section with an
original or amended federal income tax return for the taxable year in which the payment was made.

1315

4. Examples
It is assumed for purposes of the following examples that Employee is an individual whose taxable year is the calendar year
and Employee and Employer both satisfy
the applicable requirements of §§ III and
IX of this notice.
Example 1: Employee makes a timely election
to defer 10% of a bonus payable in 2008 pursuant
to an account balance plan. The bonus is $100,000.
Employer erroneously defers only 8% of the bonus,
or $8,000, and pays Employee $92,000 (instead of
deferring $10,000 and paying Employee $90,000).
Employer discovers the error on February 1, 2010.
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 2008 Form
W–2. Employer is permitted to report as income
under § 409A on the 2008 Form W–2 (or 2008 Form
W–2c), Box 12, using Code Z, only $2,000, and
Employee is permitted to include in income under
§ 409A for 2008 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. However, to qualify for the relief, Employee must file an original or amended 2008 income
tax return reflecting the additional tax on or before
December 31, 2010.
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 $5,000 per month. Employee separates
from service on April 18, 2008, and is scheduled
to receive an initial annuity payment on November
1, 2008. Due to a miscalculation of the specified
employee’s separation from service date, Employee
receives a $5,000 payment on October 1, 2008,
before the end of the six-month period following
Employee’s separation from service. Employer and
Employee do not discover the error until 2010. Employer must treat the amount paid to Employee as
a wage payment for employment tax and reporting
purposes, as appropriate, including reporting as income on the 2008 Form W–2. Employer is permitted
to report as income under § 409A on the 2008 Form
W–2 (or 2008 Form W–2c), Box 12, using Code Z,
only $5,000, and Employee is permitted to include in
income under § 409A in 2008 only $5,000. Furthermore, Employee is permitted to pay the additional
20% tax only with respect to the $5,000 (or $1,000
in additional income tax), and is not required to pay
the premium interest tax. However, to qualify for the
relief, Employee must file an original or amended
2008 income tax return reflecting the additional tax
on or before December 31, 2010.

December 22, 2008

C. Limited Excess Deferred Amount not
Corrected in the Same Taxable Year
1. Relief for Amounts to which § VI.C
Applies
With respect to amounts to which
§ VI.C applies, the amount includible
in income under § 409A(a) as a result
of an operational failure described in
§ VI.C.2(a) is limited to the excess amount
paid to the service provider, and does
not include any other deferred compensation under the plan, and such 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.
2. Amounts to which § VI.C Applies
This § VI.C applies if during a service
provider’s taxable year an operational failure occurs that is described in § VI.C.2(a)
and the requirements of § VI.C.2(b)
through (d) and §§ VI.C.3 and 4 are met:
(a) A failure is described in this
§ VI.C.2(a) if, under the terms of the plan
and any applicable deferral election, and
§ 409A, 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 erroneously is
not paid or made available to the service
provider.
(b) Sections IV.C, V.D and VII.D of this
notice do not apply because relief is not
available under such sections with respect
to the failure, the failure is not corrected
under such sections, or otherwise.
(c) 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. 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

December 22, 2008

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).
(d) By the end of the service provider’s
second taxable year following the year
in which the failure occurred, the service
recipient pays the service provider the
amount that should have been paid or
made available to the service provider.
3. Reporting and Withholding
The service recipient must report such
payment on a Form W–2 or Form 1099, as
applicable, for the year of the payment in
accordance with the requirements of this
section. 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(d). The
service provider must include such amount
in income and pay the additional taxes under § 409A(a) as described in this section
on an original or amended federal income
tax return.
4. Adjustment for Earnings
Any earnings allocable to such amounts
through the date of the payment must either be forfeited or added to the payment to
the service provider, and any losses allocable to such amounts through the date of the
payment must either be permanently disregarded or subtracted from the payment to
the service provider.

at which time Employee’s account balance includes
$150 in earnings on the excess $2,000 credited to
the account, Employer pays Employee $2,150. Employer reports the $2,150 as income under § 409A on
the 2010 Form W–2, Box 1 and Box 12, using Code
Z. Provided that Employee reports such income and
pays the applicable taxes, including the additional
§ 409A taxes, on a 2010 Form 1040, 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 2010, and with respect to the $2,150 includible in income under § 409A is required to pay only
the additional 20% tax (or $425 in additional income
tax), and not the premium interest tax. Employer may
also have paid Employee only the $2,000 excess deferred amount if the $150 in earnings on such amount
were forfeited.

VII. RELIEF FOR CERTAIN OTHER
OPERATIONAL FAILURES
A. General Requirements
If an operational failure to comply with
§ 409A(a) occurs but the operational failure qualifies for the relief provided in this
§ VII and is corrected in accordance with
this § VII, 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. The relief provided by this section is
not available with respect to any failure unless all of the requirements of this section
(including any requirement to file an original or amended return, but not the requirements of § IX 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.
B. Failure to Defer Amount not Corrected
in the Same Taxable Year and Certain
Erroneous Payments
1. Relief for Amounts to which § VII.B
Applies

5. Example
It is assumed for purposes of the following example that Employee is an individual whose taxable year is the calendar year
and Employee and Employer both satisfy
the applicable requirements of §§ III and
IX of this notice.
Example: Employee makes a timely election to
defer 8% of a bonus payable in 2009 into an account
balance plan. The bonus is $100,000. Employer erroneously defers 10% of the bonus, or $10,000, and
pays Employee $90,000 (instead of deferring $8,000
and paying Employee $92,000). Employer discovers
the error on February 1, 2010. On March 1, 2010,

1316

With respect to amounts to which
§VII.B applies, the amount includible in
income under § 409A(a) as a result of a
payment described in § VII.B.2(a) 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.

2008–51 I.R.B.

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) for the year in
which the amount is includible in income
under § 409A(a) (the year of the failure),
but is not required to pay the additional
tax under § 409A(a)(1)(B)(i)(I) (the premium interest tax). If the requirements of
this section are met, for taxable years following the year during which the failure
occurred, the amount repaid by the service
provider is treated as an amount previously included in income for purposes of
§ 409A(c).
2. Amounts to which § VII.B Applies
This § VII.B applies if during a service
provider’s taxable year an operational failure occurs that is described in § VII.B.2(a)
and the requirements of § VII.B.2(b)
through (d) and §§ VII.B.3 and 4 are met:
(a) A failure is described in this
§ VII.B.2(a) if an amount of nonqualified deferred compensation that, under
the terms of the plan and any applicable deferral election, and § 409A, should
not have been paid or made available
to a service provider in a taxable year
of the service provider, was erroneously
paid or made available to the service
provider in that year, and such payment
does not fail to meet the requirements of
§ 409A(a)(2)(B)(i) (requirement to delay
for six months payments of a specified
employee upon separation from service).
For rules relating to correction of certain
payments that fail to meet such requirements, see § VII.C of this notice;
(b) Sections IV.A, IV.B, V.B, V.C and
VI.B of this notice do not apply because
relief is not available under such sections
with respect to such failure, the failure is
not corrected under such sections, or otherwise;
(c) 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 second taxable
year following the year in which the erroneous overpayment occurred, 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

2008–51 I.R.B.

erroneously paid or made available to the
service provider, 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.
(d) If the service provider is an insider
(as defined in this § III.G) with respect to
the service recipient, the service provider
pays interest to the service recipient at
the time the service provider repays the
amount to the service recipient at a rate
not less than the short-term applicable Federal rate (AFR) under § 1274(d)(1), based
on annual compounding, for the month
in which the erroneous payment was paid
or made available, compounded as of the
end of the service provider’s taxable year.
For this purpose, the interest rate is the
short-term AFR for the month in which
the erroneous payment was paid or made
available. If the amount paid on a repayment date is less than the entire erroneous
payment, for each repayment date the interest calculation is applied by substituting
the unpaid balance immediately before the
repayment for the amount of the erroneous
payment.
3. Reporting and Withholding
The service recipient must report the erroneous payment as an amount includible
in income under § 409A on a Form W–2
(or Form W–2c), under Box 12, Code Z,
or Form 1099 (or corrected Form 1099),
as applicable, for the year in which the
erroneous payment was made. The service provider must include the amount of
the erroneous payment in income under
§ 409A on and pay the additional taxes under § 409A(a) with an original or amended
federal income tax return for the year in
which the erroneous payment was made,
and must not claim a deduction or other adjustment reflecting the repayment for the
year in which the service provider repays
the amount to the service recipient.
4. Adjustment for Earnings
For purposes of this § VII.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

1317

(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 applicable deadline for repayment.
5. Example
It is assumed for purposes of the following example that Employee is an individual whose taxable year is the calendar
year, at all relevant times Employee is not
an insider with respect to Employer as defined in § III.G, and Employee and Employer both satisfy the applicable requirements of §§ III and IX of this notice.
Example: Employee makes a timely election to
defer 50% of a bonus payable in 2008 pursuant to an
account balance plan. The bonus is $300,000. Employer erroneously defers only 25% of the bonus, or
$75,000, and pays Employee $225,000 (instead of
deferring $150,000 and paying Employee $150,000).
Employer discovers the error on June 1, 2010. Employee pays $75,000 to Employer on July 1, 2010 (or
alternatively, Employer retains $75,000 of compensation that Employee was otherwise due on July 1,
2010). As a payment to Employee, Employer must
treat the 2008 payment as a wage payment for employment tax and reporting purposes, as appropriate,
including reporting as income and wages on the 2008
Form W–2. Employer is permitted to report as income under § 409A on the 2008 Form W–2 (or 2008
Form W–2c), Box 12, using Code Z, only $75,000,
and Employee is permitted to include in income under
§ 409A for 2008 only $75,000. Furthermore, for 2008
Employee is permitted to pay the additional 20% tax
only with respect to the $75,000 (or $15,000 in additional income tax), and is not required to pay the
premium interest tax. The 2010 Form W–2 provided
to the Employee must not reflect any reduction in income due to the repayment, including if the repayment were made through the reduction in compensation otherwise payable to the Employee, and Employee is not permitted a deduction or any other adjustment to income on Employee’s 2010 Form 1040
reflecting the repayment. For future taxable years,
Employee is treated for purposes of § 409A(c) as
having previously included in income $75,000 of the
amount deferred under the plan.

C. Incorrect Payment of Amount Payable
in Same Taxable Year or Incorrect
Payment in Violation of § 409A(a)(2)(B)(i)
not Corrected in the Same Taxable Year
as the Failure
1. Relief for Amounts to which § VII.C
Applies
With respect to amounts to which
§ VII.C applies, the amount includible in
income under § 409A(a) as a result of a

December 22, 2008

payment described in § VII.C.2(a) 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). Provided that the requirements of
this section are met, for taxable years following the year during which the failure
occurred, the amount repaid by the service
provider is treated as an amount previously included in income for purposes of
§ 409A(c).
2. Amounts to which § VII.C Applies
This § VII.C applies if during a service
provider’s taxable year an operational failure occurs that is described in § VII.C.2(a)
and the requirements of § VII.C.2(b)
through (d) and §§ VII.C.3 and 4 are met.
(a) A failure is described in this
§ VII.C.2(a) if an amount of nonqualified deferred compensation that, under the
terms of the plan and any applicable deferral election, should not have been paid or
made available to a service provider until
a later date in the same taxable year, erroneously was paid or made available to the
service provider during such taxable year
more than 30 days before such later date,
or an amount 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),
(i) would have been payable less than six
months after the service provider’s separation from service if the service provider
had not been a specified employee, (ii)
because the service provider was a specified employee the amounts should not
have been paid or made available within
the six-month period following the service
provider’s separation from service, and
(iii) such amounts were erroneously paid
or made available to the service provider
within such six-month period.

December 22, 2008

(b) Sections IV.B, V.C, and VI.B of this
notice do not apply because relief is not
available under such sections with respect
to such failure, the failure is not corrected
under such sections, or otherwise.
(c) On or before the end of the second
taxable year during which the failure occurred, the service provider repays to the
service recipient the amount that was erroneously paid or made available to the service provider.
(d) 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 that same
number of days after the amount is repaid
as the number of days from the date the service recipient made the erroneous payment
to the service provider through the date
the amount would otherwise have been
payable under the terms of the plan and the
applicable deferral election, and the repaid
amount is not paid or made available to the
service provider before such date (for rules
regarding the counting of days, see § III.H
of this notice).
3. Reporting and Withholding
The service recipient must report the erroneous payment as an amount includible
in income under § 409A on a Form W–2
(or Form W–2c), under Box 12, Code Z,
or Form 1099 (or corrected Form 1099),
as applicable, for the year in which the
erroneous payment was made. The service provider must include the amount of
the erroneous payment in income under
§ 409A on and pay the additional taxes under § 409A(a) with an original or amended
federal income tax return for the year in
which the erroneous payment was made,
and not claim a deduction or other adjustment reflecting the repayment for the year
in which the service provider repays the
amount to the service recipient.
4. Adjustment for Earnings
For purposes of this § VII.C, the service provider’s account balance or other
amount of deferred compensation under
the plan may not be adjusted for earnings,
but may be adjusted for losses, retroactive to the date the amount was erroneously
paid or made available, provided that such
adjustment must be made on or before the
applicable deadline for repayment.

1318

5. Examples
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)
and an insider with respect to Employer as
defined in § III.G of this notice, and Specified Employee and Employer both satisfy
the applicable requirements of §§ III and
IX of this notice.
Example 1: Under a nonqualified deferred compensation plan sponsored by Employer, Specified
Employee has a legally binding right to a $100,000
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, 2008 so that
the payment is due on June 1, 2009. Employer erroneously pays Specified Employee $100,000 on April
1, 2009 (61 days before the due date). Employer
discovers the error on July 1, 2010, and Specified
Employee repays the $100,000 to Employer on
July 1, 2010. Immediately after such repayment
Specified Employee has a legally binding right to
receive $100,000 from Employer on August 31, 2010
(61 days after the July 1, 2010 repayment date) and
Employer does not repay the amount to Specified
Employee before that date. Employer treats the
payment as a 2009 wage payment for employment
tax and reporting purposes, as appropriate, including
reporting as income and wages on the 2009 Form
W–2. Employer must report as income under § 409A
on the 2009 Form W–2 (or 2009 Form W–2c), Box
12, using Code Z, only the $100,000 payment, and
Specified Employee is permitted to include in income
under § 409A for 2009 only $100,000. Furthermore,
Specified Employee is permitted to pay the additional
20% tax only with respect to the $100,000 (or
$20,000 in additional income tax), and is not required
to pay the premium interest tax. The 2010 Form W–2
provided to Specified Employee must not reflect any
reduction in income due to the repayment, including
if the repayment were made through the reduction
in compensation otherwise payable to Specified
Employee, and Specified Employee is not permitted
a deduction or any other adjustment to the 2010 Form
1040 reflecting the repayment. For 2010, Specified
Employee is treated as having previously included in
income $100,000 of the amount deferred under the
plan for purposes of § 409A(c).
Example 2: Under a nonqualified deferred compensation plan sponsored by Employer, Specified
Employee has a legally binding right to a $100,000
payment of deferred compensation on the specified
date of July 1, 2009 (so that the payment is not subject to § 409A(a)(2)(B)(i)). Employer erroneously
pays Specified Employee the $100,000 on May 1,
2009 (61 days before the due date). Employer discovers the error on December 1, 2010, and Specified
Employee repays the amount to Employer on December 1, 2010. Immediately after such repayment
Specified Employee has a legally binding right to
receive the amount from Employer on January 31,
2011 (61 days after the December 1, 2010 repayment

2008–51 I.R.B.

date) and Employer does not repay the amount to
Specified Employee before that date. Employer
treats the 2009 payment as a wage payment for employment tax and reporting purposes, as appropriate,
including reporting as income and wages on the
2009 Form W–2. Employer is permitted to report
as income under § 409A on the 2009 Form W–2 (or
2008 Form W–2c), Box 12, using Code Z, only the
$100,000 payment, and Specified Employee is permitted to include in income under § 409A for 2009
only $100,000. Furthermore, Employee is permitted
to pay the additional 20% tax only with respect to the
$100,000 (or $20,000 in additional income tax), and
is not required to pay the premium interest tax. The
2010 Form W–2 provided to Specified Employee
must not reflect any reduction in income due to the
repayment, including if the repayment were made
through the reduction in compensation otherwise
payable to Specified Employee, and Specified Employee is not permitted a deduction or any other
adjustment to the 2010 Form 1040 reflecting the
repayment. Beginning with the taxable year 2010,
Specified Employee is treated as having previously
included in income $100,000 of the amount deferred
under the plan for purposes of § 409A(c).

D. Excess Deferred Amount not Corrected
in the Same Taxable Year
1. Relief for Amounts to which § VII.D
Applies
With respect to amounts to which
§ VII.D applies, the amount includible in
income under § 409A(a) as a result of a
failure described in § VII.D.2(a) 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. Provided that the
service provider includes such amount
in income, pays the additional taxes and
otherwise meets the requirements of this
notice, for taxable years after the year of
the failure the amount is treated as previously included in income for purposes of
§ 409A(c).
2. Amounts to which § VII.D Applies
This § VII.D applies if an operational failure occurs during a service
provider’s taxable year that is described
in § VII.D.2(a) and the requirements of
§ VII.D.2(b) through (c) and §§ VII.D.3
and 4 are met.

2008–51 I.R.B.

(a) A failure is described in this
§ VII.D.2(a) if, under the terms of the plan
and any applicable deferral election, and
§ 409A, 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 erroneously is
not paid or made available to the service
provider;
(b) Sections IV.C, V.D and VI.C of this
notice do not apply because relief is not
available under such sections with respect
to the failure, the failure is not corrected
under such sections, or otherwise;
(c) By the end of the service provider’s
second taxable year following the taxable
year during which the failure occurred, the
service recipient pays the service provider
the amount that should have been paid or
made available to the service provider.
3. Reporting and Withholding
The service recipient must report such
payment on a Form W–2 (or Form W–2c)
or Form 1099 (or corrected Form 1099),
as applicable, for the taxable year in which
the payment was scheduled to be made under the terms of the plan (or, in the case of
an amount that should not have been deferred, the taxable year in which the payment was scheduled to be made but for the
erroneous deferral). 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 scheduled to be 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(d). The service provider must include such amount in income on and pay
the additional taxes under § 409A(a) with
an original or amended federal income tax
return for the taxable year in which the
payment was scheduled to be made under
the terms of the plan (or, in the case of an
amount that should not have been deferred,
the taxable year in which the payment was
scheduled to be made but for the erroneous
deferral).

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4. Adjustment for Earnings
The remaining account balance (or
other deferred compensation under the
plan) must be adjusted for earnings and
may be adjusted for 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 paid to the
service provider under § VII.D.2(c). The
service recipient may not pay the service
provider interest, or otherwise compensate
the service provider for the use of such
funds.
5. Example
It is assumed for purposes of the following example that Employee is an individual whose taxable year is the calendar year, at all relevant times Employee
is an insider with respect to Employer as
defined in § III.G of this notice, and Employee and Employer both satisfy the applicable requirements of §§ III and IX of
this notice.
Example: Employee makes a timely election to
defer 10% of a bonus payable in 2009 into an account
balance plan. The bonus is $300,000. Employer
erroneously defers 20% of the bonus, or $60,000,
and pays Employee $240,000 (instead of deferring
$30,000 and paying Employee $270,000). Employer
discovers the error on February 1, 2010, so that the
excess deferred amount of $30,000 is not corrected by
December 31, 2009. On March 1, 2010, at which time
Employee’s account balance includes $1,500 in earnings on the excess $30,000 credited to the account,
Employer pays Employee $30,000 and Employee forfeits the $1,500 in earnings. Employer reports the
$30,000 as income under § 409A on the 2009 Form
W–2, Box 1 and Box 12, using Code Z. Provided that
Employee reports such income and pays the applicable taxes, including the additional § 409A taxes, on a
timely filed 2009 Form 1040 (or amended 2009 Form
1040), and satisfies the other applicable requirements
of this § VII, Employee is permitted to include in income under § 409A only $30,000 and to pay only
the additional 20% tax (or $6,000 in additional income tax), and not the premium interest tax. Beginning with the taxable year 2010, Specified Employee
is treated as having previously included in income
$30,000 of the amount deferred under the plan for
purposes of § 409A(c).

VIII. SPECIAL TRANSITION RULE
FOR NON-INSIDERS
With respect to a service provider that
was not an insider at any time during the

December 22, 2008

service provider’s taxable year in which
a failure occurred, such service provider
may use the relief provided in § V.B, § V.C
or § V.D of this notice with respect to
an operational failure addressed by such
sections that occurred on or before December 31, 2007, in which case for purposes of applying such section the service
provider’s taxable year ending in 2009 will
be treated as the taxable year next following the taxable year during which the failure occurred. With respect to an erroneous early payment addressed by § V.B,
if the original due date for the payment
would have occurred on or before December 31, 2009, the amount may be treated
for purposes of applying § V.B as otherwise payable under the terms of the plan
during the year immediately following the
year of the failure for purposes of qualifying for the relief.
IX. 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 § IV
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 § IV of Notice 2008–113” setting out the information required by § IX.A.1 of this notice,
and must provide to each service provider
affected by such failure a statement entitled “§ 409A Relief under § IV of Notice
2008–113” setting out the information required by § IX.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 Form 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 § IV.D of this notice (Correction of Exercise Price of Otherwise Excluded Stock Rights), the service recipient
is not required to provide a statement to
such service provider with respect to such

December 22, 2008

failure. In addition, each taxpayer relying
on the relief provided in § IV of this notice must make reasonable efforts to 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 § IV.D of this notice).
1. Attachment to Service Recipient Tax
Return for Failures Described in § IV
The service recipient must attach a
statement to its federal income tax return
stating that it is relying upon § IV 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 § IX.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 § IX.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.

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2. Information to be Provided to Service
Provider for Failures Described in § IV
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 § IV of this notice (other than
§ IV.D 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 § IV
of this notice with respect to a failure to
comply with § 409A.
(b) The information described in
§ IX.A.1(b) through (e) of this notice.
B. Information Required with Respect to
Relief for Certain Operational Failures
A service recipient described in § V,
§ VI, or § VII 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, and for a service recipient described
in § VIII of this notice its timely-failed
(including extensions) original federal
income tax return for the taxable year
including January 1, 2009, a statement
entitled “§ 409A Relief under § [INSERT
APPROPRIATE SECTION] of Notice
2008–113” setting out the information
required by § IX.B.1 of this notice. In
addition, 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), or in the case of a
service recipient described in § VIII, not
later than January 31, 2010, such service
recipient must provide to each such service provider a statement entitled Ҥ 409A
Relief under § [INSERT APPROPRIATE
SECTION] of Notice 2008–113” setting
out the information required by § IX.B.2
of this notice. A service provider who is
relying on the relief provided in § V, § VI,
or § VII 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

2008–51 I.R.B.

return for the year in which such failure
was discovered (or for a service provider
who is relying on the relief provided in
§ VIII of this notice, the service provider’s
timely-filed (including extensions) original federal income tax return for 2009) the
information required by § IX.B.3 of this
notice. In addition, each taxpayer relying
on the relief provided in § V, § VI, § VII or
§ VIII of this notice must make reasonable
efforts to 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.
1. Attachment to Service Recipient Tax
Return for Failures Described in § V, § VI,
§ VII or § VIII
The service recipient must attach a
statement to its return setting out the following information with respect to each
failure described in § V, § VI, § VII or
§ VIII 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 § IX.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 § IX.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.

2008–51 I.R.B.

2. Information to be Provided to Service
Provider for Failures Described in § V,
§ VI, § VII or § VIII
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
§ V, § VI, § VII or § VIII of this notice
with respect to such failure:
(a) A statement that the service provider
is entitled to the relief provided in § V,
§ VI, § VII, or § VIII 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
§ IX.B.1(b) through (e) of this notice.
3. Attachment to Service Provider Tax
Return for Failures Described in § V, § VI,
§ VII or § VIII
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.
X. EFFECT ON OTHER
DOCUMENTS
For taxable years beginning on or after
January 1, 2009, Notice 2007–100 is obsoleted. Taxpayers may rely on this Notice 2008–113 for taxable years beginning
before January 1, 2009. For service recipients and service providers who are entitled to relief under this notice, Notice
2006–100, 2006–2 C.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 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 Z, or
Form 1099–MISC, Box 7 and Box 15b, as
applicable.

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XI. REQUEST FOR COMMENTS
The Treasury Department and the IRS
are considering whether to extend the
ability of certain service providers to repay an incorrect payment of a deferred
amount over an extended period if the
service provider would otherwise experience an immediate and heavy financial
need as defined in §1.401(k)–1(d)(3)(iii)
due to the repayment requirement to the
relief provided in § VIII, subject to the
service provider submitting an appropriate
extension of the statute of limitations on
assessment with respect to the taxable year
in which the failure occurred. Comments
are requested on all aspects of such potential relief, including whether such relief
would be utilized and how such relief
would be implemented.
The Treasury Department and the IRS
are also considering whether a program
providing relief in the case of a plan document failure that is brought into compliance with § 409A would be both feasible and advisable. To the extent such a
program is adopted, the Treasury Department and the IRS intend that such guidance not allow taxpayers who sponsor or
participate in a noncompliant plan an advantage in comparison to taxpayers who
sponsor or participate in a compliant plan,
by providing the sponsor of, or the participants in, the noncompliant plan greater
flexibility to change the time and form of
payment of deferred amounts than would
have been available if no such plan document failure had occurred. In addition,
the Treasury Department and the IRS intend that such a program maintain strong
incentives for taxpayers to comply in full
with the requirements of § 409A.
The Treasury Department and the IRS
request comments on all aspects of such a
potential program, including how such a
program would apply to provisions governing the timing of deferral elections as
well as provisions governing the times
and forms of payments of amounts deferred. The Treasury Department and the
IRS specifically request comments on the
following issues:

•

What types of failures would be eligible for the relief (and what types of
failures would not be eligible for the
relief)?

December 22, 2008

•
•

•

•

•
•

Should relief be limited to minor or
nonmaterial errors and if so how would
the materiality of a failure be determined?
To the extent eligibility for the relief
is contingent upon whether a noncompliant plan provision has been put into
effect, or whether a noncompliant plan
provision is applicable to or affects
an amount deferred, what standards
would apply to determine whether
such a noncompliant plan provision
has been put into effect or otherwise
applies to or affects an amount deferred?
What rules would govern the appropriate correction for the noncompliant
plan provision and how would such
rules avoid granting an impermissible
late subsequent deferral election or
election to accelerate a payment?
How would the correction and relief
apply if the correction were made during the service provider’s taxable year
and would there be any distinction between amounts deferred before the correction and amounts deferred in the
same year but after the correction?
What information would service
providers and service recipients be required to file with the IRS to make use
of such correction procedure?
What procedure would service recipients be required to implement to prevent a recurrence of the same or a substantially similar plan document failure?

Comments must be submitted by March
6, 2009. All materials submitted will be
available for public inspection and copying. Comments may be submitted to Internal Revenue Service, CC:PA:LPD:RU
(Notice 2008–113), 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
2008–113), Room 5203. Submissions
may also be sent electronically via the
internet to the following email address:
[email protected].
Include the notice number (Notice
2008–113) in the subject line.

ing 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.

XII. PAPERWORK REDUCTION
ACT

XIII. DRAFTING INFORMATION

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 § IX. This information is required
to determine whether the taxpayers claim-

The principal author of this notice is
Stephen Tackney 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 at (202)
927–9639 (not a toll-free number).

Tables for Figuring Amount
Exempt From Levy on Wages,
Salary, and Other Income
Notice 2008–114
1. Table for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income
(Forms 668-W(c), 668-W(c)(DO), 668-W(ICS)) 2009
Publication 1494, shown below, provides tables that show the amount of an individual’s income that is exempt from a notice
of levy used to collect delinquent tax in 2009.
(Amounts are for each pay period.)

December 22, 2008

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2008–51 I.R.B.