Golden Parachutes and 280G

Section 280G of the Internal Revenue Code imposes a 20% excise tax on "excess parachute payments" — golden parachute amounts that exceed 3× your "base amount." For senior executives at companies being acquired, getting the 280G analysis wrong can cost hundreds of thousands.

The 280G framework

Base amount = your average W-2 compensation over the 5 years before the change-of-control year (or your full compensation history if shorter). Simplified: a CFO with $500K base + $500K bonus averaging $1M/yr for 5 years has a $1M base amount.

Parachute payments = any compensation contingent on the change-of-control that, together with payments to other disqualified individuals, is at least 3× your base amount. Includes:

• Cash severance
• Accelerated vesting of equity (the value as of COC date)
• Enhanced NQDC distributions
• COBRA continuation, benefits extension
• Any bonuses or payments triggered by COC

If parachute payments exceed 3× base amount: a 20% excise tax applies to the amount exceeding 1× base amount (not just the excess over 3× — this is the gotcha). Plus the company loses the tax deduction on that portion.

A worked example

Mitigation strategies

1. Cutback provisions

Your employment agreement or change-of-control plan may include a cutback: "parachute payments shall be reduced to 2.99× base amount if such reduction results in higher after-tax net to the executive." This is the cleanest mitigation — just don't trigger 280G. Most modern executive agreements include it.

2. Tax gross-ups (rare now)

Prior to ~2008, common: the company reimburses the executive for the excise tax. Shareholders hate these, so they've largely been eliminated. If yours has one, keep it.

3. Pre-COC deferrals and adjustments

If you have visibility into an upcoming COC (which itself is regulated — be careful about MNPI), pre-COC NQDC deferrals and election changes can reduce parachute exposure. Must be done 12+ months in advance under 409A.

4. Reasonable comp documentation

Payments explicitly for personal services post-COC ("consulting for 12 months after") are NOT parachute payments. Documenting continued services structure reduces the parachute amount.

5. Mixed grant timing

Stock grants vested BEFORE the change-of-control aren't parachute payments. Stock that vests BECAUSE of the COC is. Companies that manage vesting cadence thoughtfully spread exposure.

When 280G doesn't apply

• Private companies: 280G generally doesn't apply if the company is not publicly traded AND shareholders approve the parachute payments by 75% vote. Common in private company acquisitions.
• Small business corporations (S-corp): 280G doesn't apply.
• Non-disqualified individuals: 280G applies to "disqualified individuals" (officers, 1% shareholders, highly-compensated employees). A VP who doesn't meet the threshold isn't subject.