Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 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?

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 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 Tax Implications

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 present value of Parachutethe parachute paymentbase Payment=present value of allxamount parachute payments expected Formula to Calculate the Amount of a Parachute Payment Considered to be Excess

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 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

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 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

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 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

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 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 Tax Implications

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 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. True or False?

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 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. True or False?

Golden Parachute Chapter 34 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 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? Discussion Question