280G taxes executive severance when change-of-control payments exceed 3× the base amount — a 20% excise tax on the employee, plus the company loses a deduction. Executives negotiate around this wall: the math shapes package structure, not just size.
The Mechanics
- Base amount: five-year average W-2 compensation. The 3× cut applies to change-of-control payments: severance, acceleration, sign-ons, and equity acceleration on acquisition.
- Disqualified payments: the excess is taxed at 20% excise; wages stay deductible to the company, the parachute piece is not (irs.gov publishes the rules).
- Carve-outs: non-competes, work-related bonuses, and reasonable compensation for post-signing services are excluded. Restructuring severance into exempt categories is the common mitigation.
Negotiation Plays
Full accelerated equity on acquisition is parachute-adjacent: know your 280G exposure before signing the acquisition package. Shareholder "clean-up" votes (public companies) raise the 3× threshold to 4× the base. Ask counsel to model your package against 280G; the numbers decide the structure, not the HR formula. The equity acceleration ask is in the severance scripts guide.
Put the rule into action
Write the letter with the free Severance Package Negotiation Letter generator. The state pages carry the local payout and notice windows, and the application tracker keeps the follow-up date in writing.
Put the rule into action
What triggers 280G
Section 280G applies when a change of control (sale, merger, acquisition) accelerates severance and other separation payments above three times your base amount. The base amount is built from five years of compensation history, and payments contingent on the change of control count toward the threshold. Two consequences follow: the company loses the deduction on the excess parachute payment, and the recipient pays a 20% excise tax on top of ordinary income tax.
That asymmetry is why the clause is negotiable. A company that loses a deduction will often trade cash for structure: a cutback below the threshold, a non-contingent payment, or a reasonable-compensation allocation for covenants and release terms. A board can also use shareholder ratification to escape the excise tax in some situations. The 280G entry covers the shape; the severance calculator prints your own multiplier so the ask has numbers.
Get the calculation, not the promise
Three documents decide the outcome, and none of them arrive unless you ask:
- The base amount, with the five-year compensation history used to compute it.
- The parachute estimate, listing every payment treated as contingent on the change of control, including accelerated equity vesting.
- The plan language: whether it contains a 280G cutback clause, and whether it has a better-of or netting provision.
Ask for the calculation in writing before you sign the release. Accelerated vesting is frequently the line that pushes an executive over the threshold, so the equity schedule and the acceleration trigger matter as much as the cash multiplier. See equity vesting on exit and the equity-vesting entry.
Restructure options that usually work
- Shift payments out of contingency: money for a non-compete, a non-solicit or a release can be allocated as reasonable compensation for the covenants rather than as parachute compensation.
- Cutback or better-of clause: the agreement reduces the payment at the threshold, or gives you the after-tax better outcome.
- Deferred structure: salary continuation spread past the change-of-control period changes the timing of the excess.
- Shareholder ratification: a clean-vote route the company can use for public shareholders.
Every option moves money rather than creating it. Ask for the tax effect of each structure in writing, from the company's advisor, before choosing one. The excise tax is yours, so your advisor should model it, not theirs alone.
Scripts and wording
"Please provide the 280G analysis in writing: my base amount with the compensation history used, the parachute estimate including accelerated equity, and the plan's cutback or netting clause. If the estimate exceeds the threshold, I would like the structuring options priced: covenant allocation, deferred continuation, and a reduced total with the after-tax comparison."
Concrete asks, one letter, before signing. An agreement that triggers 280G by accident is the most expensive paperwork error on an executive exit.
The 280G numbers in one view
| Line | What it is | Why it matters |
|---|
| Base amount | Five-year average of W-2 compensation | The number the 3x test is measured against |
|---|
| 3x threshold | Payments above three times the base amount | Anything over this line is an excess parachute payment |
|---|
| Excess parachute payment | The amount above the 3x threshold | 20% excise tax on the employee |
|---|
| Company deduction | Lost on the parachute portion | Wages stay deductible, the parachute piece does not |
|---|
| Carve-outs | Reasonable pay for post-signing services | Removed from the parachute calculation |
|---|
For the current text behind these numbers, start with the New York Severance Offset rule page and the New Jersey Severance Offset rule page, along with the Severance Pay definition and the severance layoff math guide hub. Those sources state the rule in full; this page only points at them.
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Frequently Asked Questions
- When does 280G actually apply?
- Only on a change of control: a sale, merger or acquisition, with payments contingent on that event. An ordinary layoff with no transaction does not trigger it. Confirm whether your severance and accelerated equity are tied to the transaction, since that linkage is what counts. The 280G entry explains the trigger test.
- What does the excise tax cost me?
- A 20% excise tax on the excess parachute payment, on top of ordinary income tax on the whole payment, and the company loses its deduction on that excess. That lost deduction is the company's reason to negotiate structure rather than accept the bill. Model both outcomes with the severance calculator.
- What is the base amount?
- An average of your taxable compensation over the five years preceding the year of the change of control, including bonuses and other income the rules count. It is computed from records you should get in writing: the calculation, not a summary sentence, is what tells you whether you are over the three-times threshold.
- Can I avoid it by restructuring?
- Often, by allocating part of the payment to covenants as reasonable compensation, by deferring continuation, or by accepting a cutback or netting clause. Ask for each option priced after tax before you sign. Accelerated equity vesting is frequently the line that pushes you over, so the equity schedule matters as much as the cash.
Sources (official record — verify before filing)
IRS — tax guidance