280(g) Golden Parachute Experts
As leading 280(g) compensation experts, NFP Compensation Consulting (NFPCC, formerly Longnecker & Associates) understands the importance of developing a solid compensation plan in preparation for or in the event of a change-in-control to avoid the enormous excise tax liability. Our reputation has been firmly established through engagements with dozens of companies on 280(g) related issues including proving as well as serving as advisors and expert witnesses on many M&A-related settlements and court cases since 2001.
What is a Golden Parachute Payment?
A golden parachute payment is a type of severance pay that an organization agrees to pay in the event of termination, mergers and acquisitions, or other significant change-in-control. Examples of golden parachute payments include bonus pay, incentive-based bonuses, severance pay, stock options, pension benefit payouts, deferred compensation, fringe benefits, and any increase in pay because of the pending change in control.
When Does 280g Apply?
280g applies when an executive or high valued employee is:
- Terminated or pending termination in connection with a change-in-control;
- The payment recipient is deemed a disqualified employee (meaning a shareholder, officer, or highly paid employee earning more than $150k with other restrictions);
- The amount equals or exceeds three times the executive’s average w-2 income for the previous five years.
The individual only qualifies for the 280g excise tax (aka golden parachute liability) if these three points are proven true. Most individuals want to avoid 280g tax liability if possible, which is why it is important to assess and identify any possibility of exemption for IRC § 4999.
What Qualifies as Pay Contingent Upon a Change in Control?
If a payment, payout, or another type of compensation is made to an individual that would not have been paid if a change of control was not imminent, it aids in proving the recipient’s 280g tax liability. Executives and highly paid individuals deemed liable are taxed a staggering 20% on the amount of the payment that is an “excess parachute payment”, or the amount in excess of three times the average five-year W-2 wages.
Working with dozens of public and private companies on 280(g) related issues, NFPCC has developed a proven process to advise on market best practices as it relates to executive payments upon change-in-control, especially the reduction or elimination of the liability.
280g Analysis to Eliminate Parachute Tax Liability
There are 280g liability exceptions, that can reduce or eliminate the enormous tax burden imposed on executive severance payments. Examples of disqualifying liability include employee benefit plan exceptions, the S corporation exception, 75% Shareholder approval exception, subsidiary exception, payment too low to qualify for parachute payment exception, simple or qualified retirement pay exception, simple pension pay exception, and the 403a annuities exception.
- Interacting with the management team, compensation committee and/or investors as well as the entity acquiring them.
- Interviewing company management to best understand the company culture and vision.
- Review current employment and change-in-control agreements.
- Conducting market competitive compensation analyses as it relates to severance upon a change-in-control (inclusive of multiples of base salary and annual incentive, accelerated equity vesting and tax gross-ups).
- Identify methods to reduce the impact, such as Compensation for Prior Years Services or Non-compete Valuations.
- Serving as an independent third-party advisor providing employment agreement structure and severance package recommendations in the event of termination due to a change-in-control.
NFPCC’s 280g analysis consultants have aided in saving our clients over $100 Million in excise tax liabilities through the application of proven methodologies. Contact our consulting firm for help analyzing 280g tax liability for your organization and executives.