To understand the associated tax consequences and penalties with 280G noncompliance, here’s an illustration that compares what happens when you plan ahead and are compliant.
2. What Noncompliance Looks Like
Assumptions
• 280G Limit
– Three Times Base Amount (minus 1) = $899K
• Parachute Payment
– Employment Agreement (2x) = $600K
– Unvested Equity = $100K
– Accelerated NQDC = $200K
– Total Parachute Payment = $900K
• $900K > 3x Base Amount minus 1 of $899K
resulting in an “Excess Parachute Payment”
3. What Noncompliance Looks Like
Results of Excess Parachute Payment
Penalty for noncompliance based on amount CIC value
exceeds ONE times Base Amount ($300K)
• Individual Excess Payment is $600K = ($900K - $300K)
– Tax Consequence
• Ordinary Income Tax on the full payment $900K (40%) = $360K +
• IRC 4999 Excise Tax on “Excess Parachute Payment” (20%) = $120K =
• Net CIC Benefit of $420K (53% paid in taxes )
• Corporate Excess Payment Penalty
– Non Deductibility of $600K
– Additional Cash Taxes of $240K
4. What Compliance Looks Like
Assumptions
• Base Amount $300K
– Three Times Base Amount (minus 1) = $899K
• Parachute Payment
– Employment Agreement (2x) = $600K
– Unvested Equity = $98K
– Accelerated NQDC = $200K
– Total Parachute Payment = $898K
• $898K < 3x Base Amount minus 1 of $899K
resulting in no “Excess Parachute Payment”
5. What Compliance Looks Like
Results of Excess Parachute Payment
• Individual Excess Payment is $0
– Tax Consequence
• Ordinary Income Tax on the full payment $898K (40%) =
$359K
• Net CIC Benefit of $538K (40% paid in taxes ...still sad but
better)
• Corporate Excess Payment Penalty
– Full deductibility on $898K
– Net “Cost” of $538K assuming 40% corporate tax
rate
