This notice provides guidance with respect to whether a transaction under the Emergency Economic Stabilization Act of 2008, as amended (12 U.S.C. 5021 et seq.) (EESA), that involves the acquisition by, or on behalf of, the Treasury Department of preferred stock, common stock, warrants to purchase common stock, or other types of equity of a financial institution or other entity, is an event with respect to which a payment can be made under a nonqualified deferred compensation plan pursuant to § 409A(a)(2)(A)(v) of the Internal Revenue Code (Code) and § 1.409A-3(a)(5) of the Income Tax Regulations (a permissible § 409A payment event). This notice clarifies that, for purposes of § 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 § 409A payment event. The Treasury Department and the IRS intend to amend the regulations under § 409A to incorporate the guidance set out in this notice. The guidance in this notice is effective for, and the amended regulations will be applicable to, transactions occurring on or after June 4, 2009.
Section 409A prescribes certain requirements applicable to nonqualified deferred compensation plans. If a plan does not meet those requirements, participants in the plan are required to include immediately compensation otherwise deferred under the plan in income and pay taxes on such income. As provided by § 409A(a)(1)(A)(i), a nonqualified deferred compensation plan must comply with the requirements of § 409A(a) both in form and in operation.
Section 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 or times that include, in the case of a plan maintained by a corporation, to the extent provided by the Secretary of the Treasury (Secretary), 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. Section 409A(e)(2) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 409A, including regulations relating to changes in ownership and control of a corporation for purposes of section 409A(a)(2)(A)(v).
The Treasury Department and the IRS issued final regulations under § 409A in April 2007 (T.D. 9321, 2007-1 C.B. 1123 [72 Fed. Reg. 19234] (April 17, 2007)). The final regulations apply to taxable years beginning on or after January 1, 2009. Section 1.409A-3(a) provides that the requirements of § 409A(a)(2)(A) are met only if the plan provides that an amount of deferred compensation under the plan may be paid only upon one of the six payment triggers set forth in § 1.409A-3(a). These permissible payment triggers include, under § 1.409A-3(a)(5), 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 (in accordance with § 1.409A-3(i)(5)). Section 1.409A-3(i)(5) provides a definition of a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of the corporation (collectively referred to in this notice as a change in control event).
The Treasury Department established the Troubled Asset Relief Program (TARP) under EESA, which was enacted on October 3, 2008. EESA provided immediate authority and facilities that the Secretary could use to restore liquidity and stability to the financial system. Section 101(a) of EESA authorizes the Secretary 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 are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.”
As part of its effort to restore liquidity and stability to the financial system, the Treasury Department has developed several programs and may develop additional programs. Under these programs, the Treasury Department has participated, and may participate in the future, in numerous transactions with financial institutions and other entities that involve the acquisition by, or on behalf of, the Treasury Department of preferred stock, common stock, warrants to purchase common stock, or other types of equity of the financial institution or other entity (collectively referred to as Treasury EESA Equity Acquisition Transactions).
The Treasury Department and the IRS anticipate that most of the financial institutions and other entities involved in Treasury EESA Equity Acquisition Transactions are, and will be, sponsors of nonqualified deferred compensation plans subject to § 409A of the Code. Questions have arisen whether the Federal government’s acquisition of an equity interest in a financial institution or other entity in connection with a Treasury EESA Equity Acquisition Transaction constitutes a change in control event and accordingly a permissible § 409A payment event.
The final regulations under § 409A were promulgated before the enactment of EESA. Therefore, the final regulations do not explicitly provide guidance with respect to whether a Treasury EESA Equity Acquisition Transaction constitutes a change in control event and a permissible § 409A payment event.
The Treasury Department and IRS have determined that a Treasury EESA Equity Acquisition Transaction is not a change in control event under § 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 § 409A, and would be contrary to the public interest. For example, payment of nonqualified deferred compensation amounts as a result of a Treasury EESA Equity Acquisition Transaction could reduce the liquidity of the financial institution or other entity, which is directly contrary to the purpose of a Treasury EESA Equity Acquisition Transaction.
For purposes of § 409A, a Treasury EESA Equity Acquisition Transaction is not a change in control event and, accordingly, is not a permissible § 409A payment event. (This notice does not address whether a Treasury EESA Equity Acquisition Transaction constitutes a change in control event for any other purpose). Accordingly, a nonqualified deferred compensation plan will fail to satisfy the requirements of § 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 § 409A(a) merely because the plan fails to make a payment on account of a Treasury EESA Equity Acquisition Transaction. A nonqualified deferred compensation plan will not fail to satisfy the plan document requirements of § 409A(a) and the regulations thereunder merely because the plan fails to explicitly provide that a Treasury EESA Equity Acquisition Transaction will not trigger a payment under the plan, regardless of whether the plan incorporates the definition of a change in control event by reference to the final regulations or sets forth a definition of a change in control event that otherwise meets the requirements of the final regulations. The guidance in this notice is effective June 4, 2009.
The Treasury Department and the IRS intend to amend the regulations under § 409A(a) to incorporate the guidance set out in this notice. Such amended regulations will be applicable to Treasury EESA Equity Acquisition Transactions entered into on or after June 4, 2009.
The principal author of this notice is Bill Schmidt of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), although other Treasury and IRS officials participated in its development. For further information on the provisions of this notice, contact Bill Schmidt at (202) 927-9639 (not a toll-free number).
The Internal Revenue Bulletin is produced and published by the Internal Revenue Service and contains IRS pronouncements affecting tax analysis under the Code and the Regulations, including but not limited to Revenue Procedures, Revenue Rulings, Notices and Announcements. Access the IRS site at https://www.irs.gov/help/irsgov-accessibility for information concerning accessibility of IRS materials. While every effort has been made to ensure that the IRB database files available through the TouchTax application are accurate, those using TouchTax for legal research should verify their results against the printed versions of the IRBs available from the IRS.