Section 280G and Golden Parachutes: What Founders, Executives, and Investors Need to Know

Table of Contents

• What Are Golden Parachutes?
• When Does a Change in Control Happen?
• Who Counts as a “Disqualified Individual”?
• The 280G “Safe Harbor” Threshold
• Common Pitfalls in Section 280G Planning
• Why Early Planning Matters
• How We Can Help
• Conclusion

When a company is sold or goes through a merger, executive payouts, often called “golden parachutes,” tend to get a lot of attention.

These payments can be a way to reward and retain top talent during big changes, but they also come with strict tax rules under Section 280G of the Internal Revenue Code.

If you don’t plan ahead, Section 280G can create expensive problems, for both the company and the executives, including big excise taxes for recipients and a loss of valuable tax deductions for the business.

This guide breaks down the basics of golden parachutes, how Section 280G works, and the most common mistakes to avoid.

What Are Golden Parachutes?

A “golden parachute” is any payment in the nature of compensation made to executives or other key individuals in connection with a change in control, such as a merger or acquisition.

These payments can take many forms, including wages, bonuses, severance pay, accelerated vesting of stock options, equity grants, fringe benefits, pension benefits, and other deferred compensation.

They also include less obvious items like the transfer of company property, certain contributions to retirement or cafeteria plans, and salary continuation agreements.

When Does a Change in Control Happen?

Section 280G applies when there is a change in ownership or control.

This can happen when one person, or a group, acquires 50% or more of the company’s total voting power or fair market value, or assets worth one third or more of the company’s total value are transferred within 12 months, or 20% or more of the company’s voting stock changes hands in a 12 month period, or a majority of the board is replaced in a 12 month period without endorsement from the existing board.

Who Counts as a “Disqualified Individual”?

Section 280G applies only to certain “disqualified individuals” (DQIs), which include certain officers, 1% shareholders, and highly compensated individuals (earning more than $155,000 in 2024) who are among the top 1% highest paid employees or within the top 250 earners.

This can include foreign executives, key contractors, and even former employees if they left within 12 months before the change in control.

The 280G “Safe Harbor” Threshold

A key concept in Section 280G is the “safe harbor” amount. This is three times the executive’s “base amount,” which is their average taxable compensation over the previous five years.

If the total change in control payments are at or below the safe harbor threshold, there is no excise tax and the company keeps its deduction.

If they exceed the safe harbor amount by even $1, the excess over the base amount is subject to a 20% excise tax for the executive and becomes non deductible for the company.

Example, if an executive’s base amount is $200,000, their safe harbor is $600,000.

If parachute payments are $599,999, no penalty applies. If payments are $600,000, the $400,000 above the base amount is subject to the 20% excise tax and non-deductibility.

Read also: Unlocking the Benefits of Section 1202 QSBS for Startup Founders in an M&A Deal

Common Pitfalls in Section 280G Planning

1. Missing People Who Count as DQIs — Officers aren’t limited to the CEO or CFO. Missing someone can cause a surprise tax bill later.
2. Forgetting That Termination Isn’t Required — Payments can be contingent on a change in control even if the executive keeps their job.
3. Overlooking Certain Compensation — Accelerated equity vesting, retention bonuses, post transaction raises, and gross up payments can all push you over the limit.
4. Gross Up Payments Backfiring — Covering an executive’s excise tax liability can itself be counted as part of the parachute, making the problem worse.
5. Ignoring Section 162(m) Overlap — Public companies also face a $1 million cap on deductible executive pay, which gets reduced by excess parachute payments.
6. Not Using Non Competes Strategically — Payments tied to a valid covenant not to compete can sometimes be excluded from parachute calculations.
7. Miscalculating the Penalty Amount — Once you go over the safe harbor, the excise tax applies to all amounts above the base amount, not just the amount above the safe harbor threshold.

Why Early Planning Matters

Golden parachute issues often come up at the worst possible time, in the middle of deal negotiations. Addressing Section 280G early in the M&A process can prevent last minute surprises that jeopardize the deal, allow more time to structure payments in a tax efficient way, help balance executive retention with shareholder value, and ensure compliance with both 280G and related executive compensation rules.

How We Can Help

At Sutter Law, we help companies and executives navigate Section 280G from start to finish, identifying who counts as a disqualified individual, modeling payment scenarios, and drafting agreements that avoid unnecessary taxes. We work closely with corporate and tax teams to align compensation planning with business goals, so you can close your transaction with confidence.

Conclusion

If you would like an attorney at Sutter Law to review your executive compensation arrangements, evaluate Section 280G exposure, or help you structure golden parachute payments to minimize taxes and keep your deal on track, please reach out to our team. We can help you avoid costly pitfalls and design a strategy that works for everyone involved.