Golden parachute payments can reach the point when there is too much of a good thing. Congressviewed excessive golden parachute payments as detrimental to the interests of shareholders and adeterrent to corporate acquisitions. As a result, Congress enacted restrictions that limit the use of suchpayments.
If payments are determined to be excess parachute payments made to disqualified individuals, the excesspayments are not tax deductible by the employer. Further, executives receiving such payments aresubject to a 20 percent excise tax on the excess parachute payment. This is in addition to the usual incometaxes that would be assessed. The excise tax is withheld by the employer in the case of payments that areconsidered wages, and the excise tax paid is not deductible for income tax purposes by the recipient ofthe parachute payments. As if that were not enough, excess payments are subject to Social Security(FICA) taxes when paid.
As in most cases, there are exceptions to the above penalty provisions. The following golden parachutepayments are exempt from these penalty provisions:
payments from certain small business corporations (i.e., S corporations)
payments from corporations that, immediately before the change in control, have no stock that is readilytradable on an established securities market or otherwise
payments to or from certain qualified plans, including pension, profit-sharing and stock bonus plan
certain payments of reasonable compensation for personal services
Given the complexity of many executive compensation packages, it can be difficult to determine exactlyhow much of the parachute payment is "excess"
for example, valuing existing stock options.Executives at companies that are considering a golden parachute defense, should examine their personalsituation (ownership interests, current compensation packages, proposed parachute payments, etc.) andobtain expert advice on how the plan may affect them. Golden parachute payments up to three timeannual compensation fall under "safe harbor" rules
plans that exceed that level may be subject to the20% excise tax.
Silver, Tin and Pension Parachutes
These types of nonqualified deferred compensation arrangements are not as well publicized as theirgolden counterparts.
Golden parachutes are primarily used to shelter top executives in the event of a hostile takeover.Similarly, "silver," "tin," and "pension" parachutes are used to provide benefits to employees, except that amore broadly based group of employees is usually affected.
Silver parachutes provide benefits to a broad base of employees in the event of a hostile takeover.