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CCH® PENSION — 12/31/09

IRS issues guidance on application of 409A rules to deferred comp payments under TARP advisory opinion

The IRS has issued guidance on the application of Code Sec. 409A(a) to the delay or acceleration of nonqualified deferred compensation payments pursuant to a Troubled Asset Relief Program (TARP) Special Master advisory opinion. Specifically, subject to certain conditions, the compliance by a financial institution (TARP recipient) with an advisory opinion of the Office of the Special Master for TARP Executive Compensation under which the Special Master determines that changes in the time or form of payment of compensation to a service provider (certain highly compensated employees) of the TARP recipient, or that conditioning payments upon a TARP-related requirement, or both, are necessary to make the payment or arrangement consistent with the standards in the Treasury Department's interim final regulations on TARP compensation and corporate governance, will not result in a failure to satisfy the requirements of Code Sec. 409A(a).

The guidance only applies to TARP recipients and their service providers and only to the extent that the compensation paid by the TARP recipient to a service provider is addressed by an advisory opinion of the Special Master, pursuant to the Emergency Economic Stabilization Act of 2008 (EESA; P.L. 110-343), as amended by the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5), and regulations thereunder, issued after September 30, 2009.

Payments under Code Sec. 409A

If a nonqualified deferred compensation plan does not meet the requirements of Code Sec. 409A, the plan participants must include deferred compensation in income immediately and pay taxes on the income. Final regulations under Code Sec. 409A that apply to taxable years beginning on or after January 1, 2009, provide that a payment may be delayed to a date after a designated payment date under certain circumstances. The regulations further provide that a nonqualified deferred compensation plan may not permit the acceleration of the time or schedule of any payment, except pursuant to specific exceptions.

TARP Special Master advisory opinions

The EESA, as amended by the ARRA, established TARP as part of a program to restore liquidity and stability to the financial system. Under the Treasury interim final regulations, the Special Master is required to approve any compensation payments to certain employees of a TARP recipient receiving exceptional assistance. However, TARP recipients that are not receiving exceptional assistance and their employees, and other employees may request an advisory opinion from the Special Master as to whether a compensation structure is, or will or may result in payments that are, inconsistent with the purposes of EESA or TARP, or otherwise contrary to the public interest. An advisory opinion is not binding, but may be relied upon by the requesting TARP recipient and employees if they comply with the advisory opinion in all respects. As part of a favorable advisory opinion, the Special Master may determine that changes to the compensation arrangement, including to the time or form of payment, are necessary, or that a payment must be subject to certain TARP-related conditions, such as the prior repayment of some or all of the financial assistance received by the TARP recipient.

Interaction of Code Sec. 409A(a) and advisory opinions

The Special Master and TARP recipients have asked about the application of Code Sec. 409A(a) to the above-mentioned changes or TARP-related conditions. The TARP recipients have noted that compliance with advisory opinion changes as part of an overall restructuring of a compensation arrangement would often result in delays in payments and acceleration of certain payments that would not comply with Code Sec. 409A(a). Thus, TARP recipients would be forced to choose between making a payment that the Special Master has determined is inconsistent with EESA or TARP, or making a payment that the Special Master has determined is consistent with EESA or TARP but would result in severe adverse tax consequences for the individual receiving the payment. The IRS notes that the application of Code Sec. 409A(a) under these conditions would produce a disincentive for TARP recipients to comply with the advisory opinions, severely diminishing the Special Master's ability to fulfill his intended role and damaging TARP. The IRS also observes that the Code Sec. 409A final regulations were issued before the enactment of EESA and ARRA and, thus, did not address an exception for TARP advisory opinion changes to these compensation arrangements.

For the above reasons, the Treasury Department and the IRS have decided that guidance permitting a TARP recipient to comply with an advisory opinion of the Special Master under the circumstances described in this guidance without triggering adverse tax consequences under Code Sec. 409A(a) is necessary and appropriate. The permission is dependent on certain conditions being met, and, if those conditions are met, the guidance describes the favorable application of Code Sec. 409A(a) to the changes in the time and form of payment pursuant to an advisory opinion.

The Treasury Department and the IRS intend to issue regulations to allow for changes in the time and form of payments, including the acceleration of payments, to the extent necessary to comply with an advisory opinion or other determination issued by the Special Master. The regulations will also specify when a delayed payment resulting from conditions imposed by an advisory opinion or other determination will not cause an amount to fail to qualify as a short-term deferral.

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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