This chapter discusses golden parachute plans, which provide special severance benefits to executives in the event of corporate ownership changes. The biggest tax implication relates to amounts characterized as an excess parachute payment. These amounts will not normally be deductible by the employer paying the severance, and a tax penalty will be assessed on the recipient. Two references are provided for learning more. | A compensation arrangement that provides special severance benefits to executives if the corporation changes ownership and covered executives are terminated if company is target for acquisition, executives expect parachute arrangement for self-protection parachute compensation has potential for abuse What is it? Copyright 2009, The National Underwriter Company An amount characterized as “excess parachute payment” is subject to two tax sanctions: no employer deduction allowed person receiving payment is subject to a penalty tax of 20% of the excess payment An excess parachute payment is the amount of any ‘parachute payment’ LESS the portion of the ‘base amount’ allocated to the payment Tax Implications Copyright 2009, The National Underwriter Company present value of Parachute the parachute payment base Payment = present value of all x amount parachute payments expected Formula to Calculate the Amount of a Parachute Payment Considered to be Excess Copyright 2009, The National Underwriter Company Definition of parachute payment Any compensatory payment made to an employee or independent contractor who is an officer, shareholder, or highly compensated individual when: payment contingent on change in ownership of company or company assets aggregate present value of payment > 3 times base amount Tax Implications Copyright 2009, The National Underwriter Company Definition of parachute payment (cont’d) any payment made under an agreement that violates securities laws agreements made within 1 year of ownership change presumed to be parachute payment (can rebut) Tax Implications Copyright 2009, The National Underwriter Company Definition of base amount the recipient individual’s annualized includable (taxable) compensation for the ‘base period,’ the most recent five taxable years ending before the date on which the change of ownership or control occurs Tax Implications Copyright 2009, The National Underwriter Company Parachute rules do not apply to . | A compensation arrangement that provides special severance benefits to executives if the corporation changes ownership and covered executives are terminated if company is target for acquisition, executives expect parachute arrangement for self-protection parachute compensation has potential for abuse What is it? Copyright 2009, The National Underwriter Company An amount characterized as “excess parachute payment” is subject to two tax sanctions: no employer deduction allowed person receiving payment is subject to a penalty tax of 20% of the excess payment An excess parachute payment is the amount of any ‘parachute payment’ LESS the portion of the ‘base amount’ allocated to the payment Tax Implications Copyright 2009, The National Underwriter Company present value of Parachute the parachute payment base Payment = present value of all x amount parachute payments expected Formula to Calculate the Amount of a Parachute Payment Considered to be Excess Copyright 2009, The .
