I have a plan with a change in control provision that provides as follows: "a change in ownership of the Company occurs on the date on which any one person or more than one person acting as a group acquires ownership of stock of the Company that constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; provided, however, that the preceding clause shall not apply to any acquisition of stock by any current shareholder of the Company." A change in control triggers payment under the plan.

My concern is that limiting the definition to the acquisition of stock by non-shareholders is a 409A violation. Under the regulations, the definition can be limited by providing for a greater percentage, but excluding the acquisition of additional stock by current shareholders is not mentioned in the regulations.

It is my understanding that the IRS has informally indicated that a plan sponsor can limit the change in control definition to make it more restrictive to trigger a change in control. However, I can find nothing in the regulations that would permit such limitations. Does anyone have thoughts on this issue?

I think you're looking too hard at the trees and missing the forest. A CC can be a payment event only if it is a CC as defined in 409A (and the regs). If you are carving out a certain type of CC that would meet that definition so that it is not a payment event, what's the problem? It goes without saying that you can have a more restrictive definition of CC than the regs would permit, and we don't need anyone at IRS to tell us that, because the definitions in the regs establish floors, not ceilings.

The plan can provide for payment upon a "change in control" even if the definition of a "change in control" as defined under the plan is not 409A compliant. The plan would not be 409A compliant and would result in immediate taxation and the imposition of the 20% penalty on the vested benefit.

The problem with the current definition is that it allows for continuing deferral of taxation if a current shareholder acquires greater than 50% of the business. Under the regulations, this would be a change in control event. Since the payment under this plan in triggered at a change in control, if the 409A definition were used the participant would have to recognize income at that time. However, under the plan as drafted, the participant can continue to defer the compensation. Maybe the IRS does not care, but it allows for continuing deferrals, which could be an issue for the IRS.

I agree with jpod. A change in control provision is compliant if it is more restrictive about triggering than 409A allows.

I would agree with you if someone were trying to amend the change in control provision to be more restrictive.

To me the answer is not clear. I had concluded from the proposed 409A regulations that a change in control could be defined by not considering an acquisition by a current stockholder. After reviewing the final 409A regulations and comparing them with the change in control regulations for golden parachutes, I concluded that it is not safe to define a change in control other than as stated in the 409A regulations. You could easily view the exclusion of an acquisition by a current stockholder as resulting in deferred compensation being paid when there is not a change in control as defined in the regulations.