As its name implies, a golden parachute payment is meant to provide a safe financial landing for a corporate executive if they are forced to leave a company after a merger, acquisition, or takeover. These payments come with tax and securities law implications for both the company and the executive. Small business corporations, however, may qualify for an exemption from the tax requirements.
A golden parachute is a substantial incentive in a corporate executive’s compensation package that is paid if the executive leaves because they are forced out due to a merger or sale of the company. Golden parachute payments may include cash, severance pay, stock options, or a combination.
The 2017 Tax Cuts and Jobs Act (TCJA) extended the golden parachute regulations to tax-exempt organizations. The rule is similar, but the excise tax is 21%. An IRS presentation on excess tax-exempt organization executive compensation gives greater detail.
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The IRS designates golden parachute agreements as nonqualified deferred compensation (NQDC) plans between an executive and employer.
Deferred compensation is compensation in an employee’s contract that is required to be paid in the future as a result of a specific event including death, disability, or termination of employment. In order for this type of deferred compensation plan to be qualified by the IRS, it must meet some specific requirements to ensure that the plan is operated in accordance with plan documents.