Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
What is it?
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
Copyright 2009, The National Underwriter Company
1
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
Tax Implications
1.
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
2.
An excess parachute payment is
– the amount of any ‘parachute payment’ LESS
– the portion of the ‘base amount’ allocated to the payment
Copyright 2009, The National Underwriter Company
2
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
Formula to Calculate the Amount of a
Parachute Payment Considered to be Excess
Parachute
Payment =
present value of
the parachute payment
present value of all
parachute payments
expected
Copyright 2009, The National Underwriter Company
x
base
amount
3
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
Tax Implications
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
Copyright 2009, The National Underwriter Company
4
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
Tax Implications
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)
Copyright 2009, The National Underwriter Company
5
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
Tax Implications
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
Copyright 2009, The National Underwriter Company
6
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
Tax Implications
3. Parachute rules do not apply to
– corporations with no stock that is readily tradable on an
established securities market if certain provisions are met
– payment from small business corporations
– generally to payments from
• qualified retirement plans
• simplified employee pension plans
• SIMPLE IRAs
Copyright 2009, The National Underwriter Company
7
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
True or False?
1. Tax rules governing corporate deductions for
parachute payments apply equally to all types of
corporations.
2. No employer tax deduction is allowed on an excess
parachute payment.
3. Most payments that would violate securities laws
are, by definition, parachute payments.
Copyright 2009, The National Underwriter Company
8
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
True or False?
4. A payment agreement made with an executive within
a year of corporate ownership change is considered
a parachute payment, no rebuttal is allowed.
5. Parachute rules do not apply to payments from a
SIMPLE IRA.
Copyright 2009, The National Underwriter Company
9
Golden Parachute
Chapter 34
Employee Benefit & Retirement Planning
Discussion Question
In a dynamic labor market for quality executive talent,
are parachute payments necessary or do they simply
invite abuse and provide a benefit for an exclusive few
at the expense of other employees who may get fewer
benefits or the corporation’s customers who may pay a
higher price for the products or services of the
corporation?
Copyright 2009, The National Underwriter Company
10