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CCH® PENSION — 11/19/09

Code Secs. 409A and 457A present M&A issues, Treasury official notes

Practitioners doing due diligence in mergers and acquisitions (M&A) transactions have been among the first to identify issues under Code Secs. 409A and 457A that may require further guidance, observed Treasury Deputy Benefits Tax Counsel Helen Morrison. Speaking on an executive compensation panel at the Practising Law Institute's (PLI) "Tax Strategies for Corporate Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Financings, Reorganizations & Restructurings 2009," in New York on October 28, 2009, Morrison reviewed the Treasury's guidance plans under Code Secs. 409A and 457A.

Code Sec. 409A imposes strict rules for deferring compensation under a nonqualified deferred compensation plan. Code Sec. 457A is designed to accelerate the taxation of compensation deferred by U.S. employees of foreign partnerships and corporations that are not subject to U.S. taxes.

Operational corrections under Code Sec. 409A

IRS Notice 2008-113 allowed companies with violations of Code Sec. 409A to make operational corrections of those violations. Morrison emphasized that there was no document correction program available under Notice 2008-113 and that none exists at present. She also reported, however, that help is on the way: "we are working on a corrections program for documents and hope to have it released by the end of the year." In describing the limits of the document correction program, she stated that it will not give companies "carte blanche," but will help get plans into basic compliance with Code Sec. 409A.

Code Sec. 457A narrower in scope

While proposals for what became Code Sec. 457A had originally been targeted only against hedge fund management in low or no-tax foreign jurisdictions, Morrison noted that it became broader before enactment and, as enacted, should not only be of concern to hedge funds. Nevertheless, in comparing Code Sec. 457A to Code Sec. 409A, she characterized Code Sec. 457A as much more limited in scope, needing an international nexus and generally a partnership structure to trigger its limitations and requirements.

She also stated that Code Sec. 457A "is more challenging than 409A" in presenting issues to Treasury's guidance team for solutions. Referring to guidance facing Treasury under Code Sec. 409A, Morrison stated that "part of our job is to make certain that the statute is administrable and not so complicated that the IRS can't enforce it and companies can't comply."

Morrison described the Treasury's task under Code Sec. 457A to create a detailed definition of "foreign income tax" as "challenging." She did make it clear that in any case the task would not involve providing an official list of "good or bad jurisdictions." Morrison said that "we are loathe to put out a list," adding that constantly monitoring foreign jurisdictions in maintaining such a list would prove too burdensome.

The definition of "subject to a substantial risk of forfeiture" under Code Sec. 457A is not necessarily the same as the definition that should be used under Code Sec. 409A, Morrison said. At this time, it apparently is also unclear whether the IRS will adopt rules under Code Sec. 457A similar to those under Code Sec. 409A relating to acceleration of payments upon involuntary terminations.

Taking a policy-oriented view, Morrison, along with other members of the PLI panel, also noted the possible conflict between provisions such as Code Sec. 409A and Code Sec. 457A that discourage long-term deferred compensation and the goal of preventing the types of short-term compensation arrangements that contributed to the recent economic meltdown. Risk management of deferred compensation, especially in M&A transactions in which measurable and definable liabilities going into any deal are preferred, is being recognized at least in part as a reasonable counterpoint to the Code Sec. 409A and Code Sec. 457A restrictions.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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