n-09-49.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

Guidance under § 409A(a)(2)(A)(v) on certain transactions pursuant to the Emergency
Economic Stabilization Act of 2008

# Notice 2009-49

## I. PURPOSE

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.

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## II. BACKGROUND

### A. Section 409A and Permissible Change in Control Event Distributions

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 (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

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§ 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).

### B. The Emergency Economic Stabilization Act of 2008

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).

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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.

## III. GUIDANCE

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.

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(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.

## IV. ANTICIPATED REGULATIONS

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.

## V. DRAFTING INFORMATION

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

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on the provisions of this notice, contact Bill Schmidt at (202) 927-9639 (not a toll-free
number).