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Government’s Acquisition Does Not Trigger 'Change in Control' Payments Under Nonqualified Deferred Comp Plans 
 

6/12/2009  By Joseph S. Adams, Raymond M. Fernando and Andrew C. Liazos of McDermott Will & Emery LLP 
 
 

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 financial institutions or other companies under the Emergency Economic Stabilization Act of 2008 (EESA) does not constitute a permissible "change in control" event that would trigger payments under nonqualified deferred compensation plans.

Background

Code Section 409A sets forth 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 and 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 provide explicitly 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 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.

Joseph S. Adams, a partner in the law firm of McDermott Will & Emery LLP who is based in the firm’s Chicago office, concentrates his practice on employee benefits and executive compensation matters for public, private and tax-exempt. Raymond M. Fernando, a partner in the firm's Chicago office, concentrates his practice on employee compensation and benefits, including the design, administration, and restructuring of tax-qualified and non-qualified retirement plans, incentive compensation, equity compensation, and deferred compensation programs. Andrew C. Liazos, a partner in the Boston office, heads the firm's executive compensation group.

Related Articles:

Six-Month Wait for Deferred Compensation Widely Misunderstood, SHRM Online Legal Issues, September 2009

Deferred Comp: Most Admired Make Widespread Use of Nonqualified Plans, SHRM Online Compensation Discipline, February 2007

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