Section 280G and Section 4999 of the Internal Revenue Code (Code) (Golden Parachute Rules) impose certain tax consequences on the payor and recipient of parachute payments (26 U.S.C. §§ 280G and 4999). A parachute payment generally is a compensation payment made to a senior executive, highly compensated employee or more than 1% shareholder in connection with a change in ownership or control of the individual's employer.

The Golden Parachute Rules are complex and can have significant consequences for the employer and the individual. In particular, Code Section 4999 generally imposes a 20% excise tax on excess parachute payments made to an individual and Code Section 280G prohibits employers from deducting excess parachute payments.

To avoid unintended results at the time of a change in control, employers should consider the potential impact of the Golden Parachute Rules when structuring their compensation arrangements and entering into employment, severance, change in control and other agreements.

To review how a sampling of public companies are addressing the Golden Parachute Rules in executive employment agreements, see the Executive Employment Agreements (Detailed Analysis) database within What's Market, which contains summaries of recently filed executive employment agreements and allows you to analyze and compare Section 280G provisions and access the underlying public document.