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Pension and Employee Benefits: Code, ERISA, & Regulations
This series provides an authoritative and comprehensive reference to the full text of benefits-related provisions of the Internal Revenue Code, the full text of ERISA, and related proposed and final regulations, as well as the official IRS and DOL preambles, and Committee Reports.
If the Treasury Department (or an entity acting on its behalf) acquires preferred stock, common stock, warrants to purchase common stock, or other types of equity of a financial institution or other entity pursuant to the Emergency Economic Stabilization Act of 2008 (EESA; P.L. 111-5), the acquisition 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, thus, is not a permissible payment event under Code Sec. 409A(a)(2)(A)(v), according to the Treasury Department and the IRS.
Code Sec. 409A change of ownership requirements
Code Sec. 409A(a)(2)(A)(v) requires that compensation deferred under a nonqualified deferred compensation plan may not be distributed before, to the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of the corporation, or a change in the ownership of a substantial portion of the assets of the corporation. Similarly, final regulations under Code Sec. 409A that were issued in April 2007 stipulate that the requirements of Code Sec. 409A(a)(2)(A) are met only if a nonqualified deferred compensation plan provides that distributions may be paid only upon one of six payment triggers, which includes a change in the ownership or effective control of the corporation, or a change in the ownership of a substantial portion of the assets of the corporation.
Treasury equity acquisition transactions
The Treasury Department established the Troubled Asset Relief Program (TARP) pursuant to EESA, which was enacted in October 2008. EESA provides authority and facilities that the Treasury Secretary can use to restore liquidity and stability to the financial system. To accomplish this goal, the Treasury Department has participated, and may participate in the future, in transactions that involve the acquisition of various types of equity interests of financial institutions or other entities. The Treasury Department and the IRS expect that most of the financial institutions and other entities involved in the equity acquisition transactions are sponsoring or will sponsor Code Sec. 409A nonqualified deferred compensation plans. Since the Code Sec. 409A final regulations were issued before the enactment of EESA, they do not provide guidance on whether an equity acquisition transaction is, for example, a change in ownership, and a permissible Code Sec. 409A payment event.
Treasury equity acquisition transaction is not change of ownership event
The Treasury Department and IRS have determined that a Treasury equity acquisition transaction pursuant to EESA 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 under Code Sec. 409A and the final regulations. Thus, the transaction is not a permissible Code Sec. 409A payment event. To come to the opposite conclusion would be inconsistent with the purposes of EESA and Code Sec. 409A, and contrary to the public interest, according to the Treasury Department and the IRS. For example, payments of nonqualified deferred compensation amounts could reduce the liquidity of the financial institution or other entity, which is directly contrary to the purpose of a Treasury equity acquisition transaction .
Therefore, a nonqualified deferred compensation plan will fail to satisfy the requirements of Code Sec. 409A(a) if a payment is made because of a Treasury equity acquisition transaction under EESA and will not fail to satisfy Code Sec. 409A(a) merely because the plan fails to make a payment under these circumstances. In addition, a nonqualified deferred compensation plan will not fail to satisfy the plan document requirements of Code Sec. 409A(a) and final regulations merely because the plan does not explicitly provide that a Treasury equity acquisition transaction under EESA will not trigger a payment under the plan. This applies regardless of whether the plan incorporates the definition of a change of ownership event by reference to the final regulations or provides a definition that otherwise meets the requirement of the final regulations.
CCH Note: This guidance does not address whether a Treasury equity acquisition transaction under EESA is a change in ownership or effective control, or a change in the ownership of a substantial portion of the assets of the corporation, for any other purpose.
Effective date
The IRS intends to amend the regulations under Code Sec. 409A to incorporate this guidance. The guidance is effective for, and the amended regulations will be applicable to, Treasury equity acquisition transactions pursuant to EESA occurring on or after June 4, 2009.
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