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TARP Pokes No 409A Holes

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When the Treasury Department acquires equity in a company, the deal does not create conditions that permit executives to withdraw assets from Section 409A deferred compensation plans.

Internal Revenue Service officials reach that conclusion in IRS Notice 2009-49, a document that responds to questions about whether government moves to take over failing financial institutions or other failing companies constitute changes in control.

For executives, a normal corporate change in control may trigger “golden parachute” contract provisions, and they also may create opportunities for executives and others to take money out of deferred comp plans early, without running afoul of tax rules.

“Treating a Treasury [Emergency Economic Stabilization Act] equity acquisition transaction as a change in control event and, therefore, a permissible payment event, would be inconsistent with the purposes of EESA and Section 409A, and would be contrary to the public interest,” officials write in the notice. “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.”

The guidance is effective June 4.

The IRS and the Treasury Department will be writing regulations to incorporate the deferred comp guidance, officials report, and the regulations will apply to transactions entered into on or after June 4, officials say.

The principal author of the notice is Bill Schmidt.

A copy of the notice is available here.


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