The IRS, in Notice 2010-80, provides a very, very small holiday gift for employers maintaining deferred compensation arrangements covered under Code Section 409A.  Last January, IRS Notice 2010-6 provided a list of voluntary plan document "fixes" for which a grace period without penalty until December 31, 2010 was given.  Now some additional corrections may be made and one of the previously permitted corrections can be delayed until December 31, 2012.  Also, employees do not have to attach a description of the correction to their 2010 tax return, although employers still have a reporting requirement.

What's new?  Specifically, "linked plans" (those deferred compensation arrangements tied to a qualified retirement plan) can now be corrected under Notice 2010-6, provided that the time or form of payment is not affected by the correction.  This means that supplemental retirement plans designed as excess plans and "wrap 401(k)" plans may now be corrected before the end of 2010. Stock rights plans that are deferred compensation under Code Section 409A (e.g., discounted stock options) that contain document compliance errors can also now be corrected under Notice 2010-6.

What's extended?  The IRS will now permit plan errors that involve payments subject to an employee providing a valid release of claims (or a noncompetition agreement or other similar agreement) to be corrected at any time through December 31, 2012, as long as the correction occurs before the "vesting" occurs (in most cases, the separation from service date).  In other words, an employment agreement which contains a severance payment provision which is tied to receipt by the employer of a valid release of claims before payment can occur doesn't have to be amended before the end of 2010.  In order to get this extension of the correction period, the arrangement must be in existence on December 31, 2010 and, when amended, must provide either for a fixed date of payment (for example, day 60 or day 90 following separation from service), or, a payment date immediately following the receipt of the valid release (and expiration of the revocation period) that is within a period of no more than 90 days following the separation from service, provided that if any amounts can be paid in more than one calendar year, such amounts can only be paid in the second calendar year. Note that if you have such an arrangement eligible for correction which provides for all payments to be made on or before March 31, 2011, such arrangement will be deemed to be in compliance and no amendment is necessary.  For example, if an executive is terminated in December 2010 and all severance payments will be made by no later than March 31, 2011 in any event, then no amendment regarding the timing of the release is required under 409A.

What must still be corrected now?  So, in the end, employers still must amend 409A arrangements prior to December 31, 2010 to correct:

• ambiguous plan terms,
• any impermissible definition of otherwise permissible payment events (i.e., correct definitions of separation from service, change in control event and disability),
• certain impermissible payment events and payment schedules,
• any failure to include language regarding the six-month delay of payment for specified employees, and
• provisions regarding impermissible initial and subsequent deferral elections. 

As for reporting obligations, the IRS did provide relief to employees and other service providers by exempting them from the duty to report information regarding plan corrections on their 2010 tax returns.  However, the employer must still file with the IRS information regarding plan corrections made pursuant to Notice 2010-6.