How Executive Severance Packages Work and What the IRS Takes

Last updated July 2, 2026

Golden parachute provisions are contractual severance arrangements for executives that activate upon a change of control, typically a merger, acquisition, or buyout. Under IRC Section 280G, payments that exceed three times the executive's average W-2 compensation over the prior five years are classified as excess parachute payments. The executive owes a 20 percent excise tax on the excess amount on top of ordinary income tax, and the company loses its tax deduction for the excess. At the highest federal marginal rate of 37 percent plus the 20 percent excise tax plus state income tax, the effective tax rate on excess golden parachute payments can exceed 70 percent in high-tax states.

The 280G threshold calculation starts with the base amount: the executive's average annual compensation from the company over the preceding five years. Multiply that by three to get the safe harbor threshold. Any payment above that threshold triggers the excise tax on the full amount above one times the base amount. Companies frequently gross up golden parachute payments to cover the executive's excise tax liability, which itself becomes a taxable benefit and can trigger additional 280G exposure. Most sophisticated severance negotiations now include 280G modeling before any agreement is signed.

If you are negotiating an executive severance package that includes change-of-control provisions, run a 280G analysis before signing. The excise tax on excess parachute payments is punishing, and structuring the package to stay below the safe harbor threshold can preserve substantially more value than a negotiation focused only on the gross dollar amount.