Just ahead of the Dec. 31, 2008, deadline for compliance with the documentary requirements of Section 409A, the IRS has issued new guidance, in the form of Notice 2008-113, providing relief for certain operational violations.

Notice 2008-113 replaces Notice 2007-100 and provides methods to address certain unintentional operational failures without incurring the full adverse tax consequences under Section 409A, 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; and

Special transition relief for certain operational failures occurring before Jan. 1, 2008.

However, the new program still doesn’t cover plan document failures, which means employers must ensure that all of their compensatory arrangements are reviewed for 409A compliance and amended as necessary prior to Dec. 31, 2008, a Dec. 5 client alert from the law firm McDermott Will & Emery notes.

The 66-page notice seeks comment 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. Comments are due by March 6, 2009.

Meanwhile, The Treasury Department also issued proposed 409A regulations providing detailed guidance on the calculation of amounts “includible” in income on a violation of section 409A, and the premium interest tax resulting from a Section 409A(a) violation that is not corrected under Notice 2009-113.

Specific rules are provided for defined contribution “account balance” plans, reimbursement arrangements, split dollar arrangements, and stock rights, according to the MWE alert.

The proposed regulations also provide:

An opportunity to correct defects with respect to unvested amounts;

That a failure in one year generally will not affect 409A compliance in a subsequent taxable year if the plan complies during the later year; and

Guidance on how a service provider may deduct amounts included in his or her income but never actually received.

The proposed regulations indicate that the Treasury intends to allow employers to rely on the proposed regulations for reporting 409A violations in 2008 and to delay annual reporting of compliant 409A deferrals until the regulations are finalized, MWE notes.

The proposed regulations don’t address how to calculate taxable amounts due to violation of funding rules (relating to offshore assets or transfers in connection with a change in the employer’s financial health) under Section 409A(b).

MWE notes that the IRS has “informally indicated that it will issue guidance either later in December 2008 or in January 2009” under the new Code Section 457A focusing primarily on the transitional relief for compensation earned on services rendered before 2009.