Section 280G of the Internal Revenue Code (Code) denies a tax deduction to corporations for parachute payments made to disqualified individuals that exceed a specified amount. Code Section 4999 imposes a nondeductible 20% excise tax (which is in addition to regular income tax) on these payments.

Although designed primarily for public companies, the golden parachute rules can also apply to private corporations. However, a payment made to a disqualified individual by a private corporation may be exempt from treatment as a parachute payment if the payment is approved by shareholders under a vote that satisfies Code Section 280G (the shareholder approval exception).

If shareholder approval is not obtained and the disqualified individual has an existing right to parachute payments that exceed a certain amount (for example, outstanding equity awards that vest on a change in control), then the shareholder approval exception is not available unless the individual waives any rights to the payments. Practical Law's Standard Document, Parachute Payment Waiver Agreement can be used to obtain a waiver in this circumstance.