On June 4, 2009, the Internal Revenue Service (IRS) released Notice 2009-49 clarifying that, for purposes of Section 409A of the Internal Revenue Code, the U.S. Department of the Treasury’s acquisition of equity interests in a financial institution or other entity under the Emergency Economic Stabilization Act of 2008 (EESA) does not constitute a permissible change in control payment event. The notice, which is immediately effective, is available at http://www.irs.gov/pub/irs-drop/n-09-49.pdf.
Background of Code Section 409A and EESA
Code Section 409A sets forth certain requirements applicable to nonqualified deferred compensation plans, including the timing of payment. For instance, one of the permissible payment triggers includes a change of control as defined in Code Section 409A and applicable regulations. Subsequent to the enactment of Code Section 409A in 2004 and the issuance of final regulations in 2007, the Treasury Department established the Troubled Asset Relief Program under the EESA to help restore liquidity and stability to the financial markets. Under this program, the Treasury Department may participate in various transactions with financial institutions and other entities involving the acquisition of their preferred stock, common stock, warrants to purchase common stock or other types of equity (referred to in the notice as a “Treasury EESA Equity Acquisition Transaction”). Because the Treasury Department’s program was introduced after the final Code Section 409A regulations, there was some uncertainty regarding whether a Treasury EESA Equity Acquisition Transaction could, under any circumstances, constitute a change in control event for purposes of Code Section 409A—that is, whether such a transaction constitutes a permissible payment trigger for nonqualified deferred compensation.
IRS and Treasury Position
The notice concludes that a Treasury EESA Equity Acquisition Transaction does not constitute a change in control event for purposes of Code Section 409A. According to the notice, treating a Treasury EESA Equity Acquisition Transaction as a change in control event 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.
The IRS and the Treasury Department intend to amend the final regulations issued under Code Section 409A to incorporate the guidance set forth in the notice, effective for Treasury EESA Equity Acquisition Transactions entered into on or after June 4, 2009. The notice confirms that a nonqualified deferred compensation plan does not need to be amended to explicitly provide that a Treasury EESA Equity Acquisition Transaction will not trigger a payment under the plan.
Finally, the notice indicates that it does not address whether a Treasury EESA Equity Acquisition Transaction constitutes a change in control event for any other purpose. However, in practice, the specific terms of each individual Treasury EESA Equity Acquisition Transaction likely will require the company to amend its change in control arrangements to ensure that payments are not triggered by the acquisition.