A “golden parachute” is a payment or benefit made by a corporation to certain executives, managers or others (called “disqualified individuals” by the IRS) when there is a “change in control” of that corporation. Internal Revenue Code Section 280G, also known as the “golden parachute payment rule,” is the federal tax provision that covers these payments.

280G: What does it do?

Section 280G both limits the amount of golden parachute payments and imposes a special excise tax on them. The rule applies only if the value of the payment is more than, or equal to, three times the average annual amount of taxable compensation that the disqualified individual received over the five years immediately preceding the change in control. If the payment is less than three times the compensation amount, even slightly, Section 280G does not apply.

Why Is 280G Important?

Section 280G was created to protect the interests of shareholders by stopping corporations from making unreasonably large payments to disqualified individuals when control of a corporation changes hands.

Section 280G applies only to corporations, both public and private. It does not apply to S-Corps, Partnerships or LLCs that are taxed as partnerships.

What is a “disqualified individual”?

“Disqualified individuals” include corporate officers, shareholders and other “highly-compensated individuals”. A “highly-compensated individual” is a person who has an annual salary of at least $115,000 and is either one of the highest paid one percent of the corporation’s employees or, if less, one of the top 250 highest paid employees of the corporation. It is important to note that while foreign individuals are are subject to Sec. 4999 excise tax, they are still subject to 280G.

What does “change in control” of a corporation mean?

Generally speaking, a “change in control” of a corporation occurs:

  • With the acquisition of 50 percent or more of the corporation’s total fair market value or of the total voting power of the corporation’s stock, or;

  • When an individual or group acquires 20 percent or more of the voting power within a 12-month period, and this degree of voting power effectively gives the individual or group control corporate operations, or;

  • When the majority of the board of directors changes during a 12-month period.

Examples of Parachute Payments

Examples of parachute payments include, among others:

  • Severance pay.

  • Cash bonuses.

  • Any continued benefits.

  • Accelerated vesting of any compensation, equity option or otherwise.

  • Retention payments.

  • Continuation of welfare or fringe benefits.

  • Success fees or transaction bonuses.

  • Stock options, restricted stock, phantom stock, or stock appreciation award

  • Equity or option grants made up to 12 months before the change of control

  • Increases in compensation as a result of the change of control

  • Changes made to employment agreements up to 12 months before the change of control

280G Exceptions

There are a number of exceptions to Section 280G, most notably for:

  • Payments made in connection to certain severance packages, 403(a) annuities, individual pensions, retirement plans and accounts.

  • Payments approved by at least 75 percent of the corporation’s disinterested shareholders. This is only possible if the stock of the corporation is not tradeable on a securities market and all people entitled to vote must receive adequate disclosure of all the important facts regarding the payments that make up the parachute payment.

  • Sale of a wholly-owned subsidiary will not result in a change of control for the parent corporation unless a substantial portion of the parent corporation’s assets change.

  • S Corporations are not subject to 280G

Tax Consequences of 280G

Under Section 280g, a 20 percent excise tax is charged to the individual on the golden parachute payment amount, in addition to any income tax. Also, the corporation making the parachute payment cannot claim a deduction on that payment.

Next Steps

If you need help figuring out golden parachute payments or in negotiating with angel investors, you can post your question or concern on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe and Twilio.