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Section 280G - Golden Parachute Rules


Applicable Law


How the Golden Parachute Rules Work:

  • In a nutshell: if a "disqualified individual" receives "parachute payments" equal to or exceeding three times (3X) his or her "base amount," then (1) the executive is subject to a 20% penalty on all parachute payments above base amount, and (2) the payor loses a deduction for that excess above base amount.
    • Beware: an accelerated vesting (or payout) of stock awards or other benefits will result in deemed parachute payments that count against the 3x limit.
    • Private Company "Cleansing Vote": Q&A-7 of the 280G regulations sets forth a mechanism for allowing disqualified individuals to receive parachute payments above the 3x limit without triggering golden parachute penalties.
    • ​FAQs from Grant Thornton
  • Anyone who is an officer or director of a company targeted in a merger or sale transaction should assess the potential impact of the golden parachute rules. This should be done at the earliest possible time because there are win-win strategies by which companies and individuals may minimize or avoid their respective golden parachute risks.


Information Needed to Make 280G Golden Parachute Calculations:

Listed below is the key information that is needed in order to perform 280G calculations for each person who is or could reasonably be considered a "disqualified individual" as defined further below. For 24/7 assistance in making 280G calculations, contact Mark of Wagner Law because we have a template that has passed Wall Street M&A diligence muster for decades.
1.       W-2 income for each of the five years ending before the year in which the change in control will close.

  • If anyone was employed for less than all of those years, the W-2 info for the partial year of employment must
    • ​identify how much of the year the compensation covered, and
    • differentiate between recurring items such as salary (which gets annualized), and one-time payments such as signing bonuses (which are not annualized).

2.       Information about any compensation or stock award that vests or becomes vested or payable due to the CIC or a termination of employment.  

  • For unvested stock awards, we need –
    • the number of shares,
    • the exercise price for options and SARs,
    • the vesting schedule, and
    • the price per share expected for the transaction.

3.       All stock plan documents and related award agreements under which unvested shares will become vested on the CIC or a termination of employment.
4.       Information about any compensatory awards that occurred within 12 months before the expected CIC closing, if at levels inconsistent with past practice.
5.       Any compensatory agreements made entered into within 12 months before the expected CIC closing.
6.       Any employment or severance agreements with executive officers.
7.       The expected closing date for the CIC.


“Disqualified Individual”
Applicable treasury regulations define this as an individual who at any time during the "disqualified individual determination period" (generally defined as the twelve-month period prior to and ending on the date of the change in ownership or control) is an employee or independent contractor of the corporation and is, with respect to the corporation --
(1) A shareholder who owns stock of a corporation with a fair market value that exceeds 1 percent of the fair market value of the outstanding shares of all classes of the corporation's stock is treated as a disqualified individual with respect to the corporation by reason of stock ownership (note that the constructive ownership rules of section 318(a) apply, and that stock underlying a vested option is considered owned by an individual who holds the vested option (and the stock underlying an unvested option is not considered owned by an individual who holds the unvested option);
(2) An officer within the meaning of Q/A-18 of the 280G regulations (which is reproduced in full below because this is the definition that most often determines whether or not an executive is a disqualified individual); or
(3) A highly-compensated individual, generally meaning a member of the group consisting of the lesser of the highest paid 1 percent of the employees of the corporation (rounded up to the nearest integer), or the highest paid 250 employees of the corporation, when ranked on the basis of compensation earned during the disqualified individual determination period.

A director is a disqualified individual with respect to a corporation if, at any time during the disqualified individual determination period, the director is, with respect to the corporation, a shareholder, an officer, or a highly-compensated individual (as described above).
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“Officer” (from Treas. Reg. 1.280G-1, Q-18)
A-18: (a) For purposes of this section, whether an individual is an officer with respect to a corporation is determined on the basis of all the facts and circumstances in the particular case (such as the source of the individual's authority, the term for which the individual is elected or appointed, and the nature and extent of the individual's duties). Any individual who has the title of officer is presumed to be an officer unless the facts and circumstances demonstrate that the individual does not have the authority of an officer. However, an individual who does not have the title of officer may nevertheless be considered an officer if the facts and circumstances demonstrate that the individual has the authority of an officer. Generally, the term officer means an administrative executive who is in regular and continued service. The term officer implies continuity of service and excludes those employed for a special and single transaction.
(b) An individual who is an officer with respect to any member of an affiliated group that is treated as one corporation pursuant to Q/A-46 of this section is treated as an officer of such one corporation.
(c) No more than 50 employees (or, if less, the greater of 3 employees, or 10 percent of the employees (rounded up to the nearest integer)) of the corporation (in the case of an affiliated group treated as one corporation, each member of the affiliated group) are treated as disqualified individuals with respect to a corporation by reason of being an officer of the corporation. For purposes of the preceding sentence, the number of employees of the corporation is the greatest number of employees the corporation has during the disqualified individual determination period (as defined in Q/A-20 of this section). If the number of officers of the corporation exceeds the number of employees who may be treated as officers under the first sentence of this paragraph (c), then the employees who are treated as officers for purposes of this section are the highest paid 50 employees (or, if less, the greater of 3 employees, or 10 percent of the employees (rounded up to the nearest integer)) of the corporation when ranked on the basis of compensation (as determined under Q/A-21 of this section) paid during the disqualified individual determination period.
(d) In determining the total number of employees of a corporation for purposes of this A-18, employees are not counted if they normally work less than 17 1/2 hours per week (as defined in section 414(q)(5)(B) and the regulations thereunder) or if they normally work during not more than 6 months during any year (as defined in section 414(q)(5)(C) and the regulations thereunder). However, an employee who is not counted for purposes of the preceding sentence may still be an officer.