280G Disqualified Individual: Shareholders, Officers, HCIs

A 280G disqualified individual is a person who performed personal services for a corporation and, at any point during the 12 months ending on a change in ownership or control, was either a more-than-1% shareholder, an officer, or a highly compensated employee of that corporation. Meeting any one of those three tests, even briefly, is enough. The label matters because contingent payments to these people can trigger a lost corporate deduction and a 20% excise tax on the recipient once the payments cross three times average annual compensation.

The Personal-Service Gateway

Before any of the three substantive tests apply, the person has to have performed personal services for the corporation. The statute reaches employees, independent contractors, and other service providers alike.¹ Someone who never provided services cannot be disqualified no matter how much stock they hold or how much the company paid them for something else.

The gateway is wide on purpose. Full-time executives, part-time consultants, board members receiving fees, and former employees whose service falls inside the look-back window all clear it. A personal service corporation or similar entity is treated as an individual, so a consulting firm controlled by one person can itself be a disqualified individual.¹

Shareholders Above 1%

A service provider is a disqualified shareholder if they own stock with a fair market value greater than 1% of the total fair market value of all outstanding shares across every class of the corporation’s stock. The Section 318(a) constructive ownership rules apply, so shares held by a spouse, children, grandchildren, or parents are attributed to the individual. Shares held through partnerships, estates, trusts, and corporations can also be attributed.² You cannot dodge the threshold by parking stock with relatives or entities under your control.p>

Stock options need a closer look. A vested option counts: the underlying stock is treated as owned by the option holder. An unvested option does not count. That distinction becomes important when a stock option plan accelerates vesting on a change in control. An employee sitting below 1% the week before the deal can cross the line on closing day because unvested options vested that same day.²

Officers by Function, Not Title

Officer status turns on genuine administrative authority. A “Vice President” whose duties are purely ministerial is not an officer for 280G purposes. Someone with no formal officer title who directs major corporate decisions can be.

The regulations cap how many people a corporation can treat as officers. The cap is the lesser of 50 or the greater of three or 10% of the corporation’s employees, rounded up.² A 200-employee company gets 20 slots. A 15-employee company would get two under the 10% math, but the floor of three applies. When more people functionally qualify than the cap allows, the regulation ranks everyone by compensation over the determination period and treats only the highest-paid as officers.

One trap for smaller employers: part-timers who work fewer than 17½ hours per week and seasonal workers who work six months or less per year drop out of the employee count used to size the cap. But those same people can still be treated as officers if they hold real authority.² The exclusion shrinks the denominator, not the candidate pool.

Highly Compensated Individuals

A service provider who is neither an officer nor a more-than-1% shareholder can still be disqualified by falling into the highly compensated group. The pool is the lesser of the top 1% of employees or the top 250 employees, ranked by compensation during the determination period. Independent contractors are counted as if they were employees for this ranking.²

At a 5,000-employee corporation, 1% is 50 people, so the pool is the top 50 earners. At a 40,000-employee corporation, 1% would be 400, but the 250 cap controls.

There is also a dollar floor. No one whose annualized compensation during the determination period falls below the threshold in Section 414(q)(1)(B)(i) can be treated as highly compensated, even if they land in the top 1%. For 2026, that threshold is $160,000.³ The number adjusts each year for inflation, so check the IRS cost-of-living announcement for the year the change in control occurs.

The 12-Month Determination Period

Disqualified status is measured over the 12-month period ending on the date of the change in ownership or control.⁴ A person only needs to meet one of the three tests at a single point during that window. An executive who resigns eight months before closing is still disqualified if she was an officer at any time in the preceding year.

The backward-looking window is deliberately hard to game. Reassigning titles, restructuring reporting lines, or trimming pay in the months before a deal will not scrub someone off the list once the closing date anchors the calculation.

No Change in Control, No Disqualified Individuals

The label only carries consequences if the transaction itself is one of the events Section 280G reaches. The regulations recognize three:

A change in ownership, when a person or group acquires stock representing more than 50% of the corporation’s total fair market value or total voting power.²
A change in effective control, when a person or group acquires 20% or more of the total voting power within a 12-month period, or a board majority is replaced during any 12-month period without the prior board’s endorsement.
A change in asset ownership, when a person or group acquires assets worth one-third or more of the corporation’s total gross fair market value within a 12-month period.

If the transaction hits none of these, Section 280G does not apply, and the question of who is a disqualified individual is academic.

Corporations That Sit Outside the Rules

The disqualified individual analysis also stops before it starts for certain entities. S corporations are exempt: the statute carves out any corporation that qualifies as a small business corporation under Section 1361(b).⁵ Partnerships are generally outside 280G as well, although a publicly traded partnership treated as a corporation under Section 7704(a) is inside it.²

Private C corporations whose stock is not traded on an established securities market have another route out. If the corporation discloses all material facts to shareholders and obtains approval from holders of more than 75% of the voting power of all outstanding stock, the payments are not treated as parachute payments. Stock owned directly or indirectly by the disqualified individual receiving the payment is excluded from the vote.⁵ The person can still be a disqualified individual on paper; a clean shareholder vote just removes the tax consequences that follow.

1
Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments
2
eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments
3
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
4
GovInfo. 26 CFR 1.280G-1 – Golden Parachute Payments
5
Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments