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CCH® PENSION AND BENEFITS — 06/12/09

IRS Addresses Certain Nonqualified Deferred Comp Payments In Stock Transactions With Financial Entities

from Spencer’s Benefits Reports: In Notice 2009-49, the Internal Revenue Service provides guidance concerning whether a transaction under the Emergency Economic Stabilization Act of 2008 (EESA) that involves the acquisition by the Treasury Department of preferred stock, common stock, warrants to purchase common stock, or other types of equity of a financial institution is an event with respect to which a payment can be made under a nonqualified deferred compensation plan pursuant to IRC Sec. 409A(a)(2)(A)(v). The notice clarifies that, for purposes of Reg. Sec. 1.409A-3(a)(5), such a transaction is not a change in ownership or effective control, or a change in the ownership of a substantial portion of the assets of the corporation and, accordingly, is not a permissible Sec. 409A payment event.

Sec. 409A prescribes certain requirements applicable to nonqualified deferred compensation plans. If a plan does not meet those requirements, participants are required to immediately include compensation deferred under the plan in gross income. Sec. 409A(a)(2)(A) provides that compensation deferred under a nonqualified deferred compensation plan may not be distributed earlier than one of six specified events that include a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation. The IRS issued final regulations under Sec. 409A in April 2007; those regulations apply to taxable years beginning on or after Jan. 1, 2009.

The Treasury Department established the Troubled Asset Relief Program (TARP) under EESA, which provided immediate authority and facilities that the Treasury Department could use to restore liquidity and stability to the financial system. Sec. 101(a) of EESA authorized the Treasury Department to establish the TARP to “purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions” as the department determines. Under the TARP, the Treasury Department has participated in numerous transactions with financial institutions that involve the acquisition by the department of preferred stock, common stock, warrants to purchase common stock, or other types of equity of the financial institution.

In Notice 2009-49, the IRS explains that it anticipates that most of the financial institutions involved in TARP equity acquisition transactions are, and will be, sponsors of nonqualified deferred compensation plans subject to Sec. 409A. The agency then states, “The Treasury Department and IRS have determined that a Treasury EESA equity acquisition transaction is not a change in control event under section 409A and the final regulations. Treating a Treasury EESA equity acquisition transaction as a change in control event and, therefore, a permissible payment event, would be inconsistent with the purposes of EESA and section 409A, and would be contrary to the public interest. For purposes of section 409A, a Treasury EESA equity acquisition transaction is not a change in control event and, accordingly, is not a permissible section 409A payment event. Accordingly, a nonqualified deferred compensation plan will fail to satisfy the requirements of section 409A(a) if a payment is made on account of a Treasury EESA equity acquisition transaction and will not fail to satisfy the requirements of section 409A(a) merely because the plan fails to make a payment on account of a Treasury EESA equity acquisition transaction.”

The IRS goes on to state that it intends to amend the regulations under Sec. 409A(a) to incorporate the guidance set out in Notice 2009-49, and that the amended regulations will be applicable to equity acquisition transactions entered into on or after June 4, 2009. For further information, contact Bill Schmidt at (202) 927-9639.

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