This is an additional underpayment interest penalty which may not apply to you. If there is any issue the IRS will send you a bill, which I do not foresee in this situation.
- For purposes of clause (i), the interest determined under this clause for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.
- US Code Section 409A
The indicator of information for the IRS with box 12, and code Z is the nonqualified amount and alert for the penalty. I can't advise you to delete the entry or leave it blank. I can say that the amount in box 12 is already included in box 1 as part of your taxable wage.
Likewise it's unclear as to whether this has different state rules. You can check to see if your state wages are the same as the federal amount in box 1. As long as the penalty is calculated and included on your return, it's likely there would be no change to the tax return. Keep all documentation and records with your tax return file.
@alexmeller
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