Section 280G Waiver: Eligibility, Disclosure, and Shareholder Vote

A Section 280G shareholder waiver lets a privately held corporation wipe out the 20% excise tax and lost deduction on golden parachute payments by putting those payments to a shareholder vote. If disqualified individuals first sign waivers agreeing to forfeit the payments unless approved, and more than 75% of the eligible voting power says yes after full disclosure, the payments escape both penalties.¹ The process is unforgiving. A flawed disclosure, a linked vote, or the wrong denominator can leave the entire exemption invalid after the deal closes.

Which Companies Can Use the Waiver

The exception under Section 280G(b)(5) is only available to certain corporate structures.

Publicly traded companies are locked out. If any stock in the corporation is listed on an established securities market, the waiver is unavailable at all.¹

S corporations don’t need the waiver in the first place. Payments made by a corporation that qualifies as a small business corporation under Section 1361(b) are excluded from the definition of parachute payment entirely, with no vote, disclosure, or waiver agreement required.¹

Non-publicly-traded C corporations are the group the waiver was written for. They can use it, but only by running the full process: written waivers, adequate disclosure, and the 75% supermajority.¹

The Affiliated Group Trap

Being private on your own isn’t always enough. A private subsidiary loses access to the waiver if any member of its affiliated group has publicly traded stock, because the IRS treats the entire affiliated group as a single corporation for 280G purposes.²

The disqualification also reaches upstream. If another entity holds a substantial portion of the corporation’s stock and that entity’s ownership interests are publicly traded, the waiver disappears. “Substantial portion” means the corporation’s stock has a fair market value equal to at least one-third of the entity’s total asset value. A private operating company held inside a publicly traded holding company can fail this test even though none of its own shares trade anywhere.²

When the Waiver Matters

Section 280G applies only when a qualifying change in control occurs. The regulations recognize three triggers: one person or group acquiring more than 50% of the corporation’s fair market value or voting power; the presumed effective-control trigger, met when someone acquires 20% or more of voting power in a 12-month window or when a majority of the board is replaced by directors the prior board didn’t endorse; and the acquisition of assets worth at least one-third of the corporation’s gross fair market value in a 12-month period.² The effective-control presumption can be rebutted if the acquirer shows management power didn’t actually shift. If none of the triggers is met, 280G doesn’t apply and the waiver isn’t needed.

The penalties only reach “disqualified individuals.” Someone qualifies if, at any point in the 12 months ending on the change-in-control date, they were an officer, a shareholder owning more than 1% of the corporation’s stock by fair market value, or one of the corporation’s highest-paid people (up to the lesser of the top 1% of the workforce or the top 250 employees).² Section 318 constructive ownership rules apply to the 1% test, so shares held by a spouse, children, grandchildren, parents, or related entities are attributed to the individual. An executive who personally owns no stock can still be a disqualified individual through family attribution.

Payments only become a problem once they cross the threshold. If the total present value of change-in-control payments to a disqualified individual equals or exceeds three times the base amount (the individual’s average annual taxable compensation over the five tax years before the year of the change in control), every dollar above one times the base amount is an excess parachute payment.¹ That excess triggers the 20% excise tax on the executive under Section 4999 and denies the corporation a deduction for the same amount.³ The waiver exists to make both penalties disappear.

The Waiver Agreement

Before any shareholder vote can take place, each disqualified individual receiving payments to be voted on must sign a waiver agreeing to give up the payment if shareholders don’t approve it. This step is non-negotiable. A vote on a payment the executive already has an unconditional right to receive isn’t a real vote, so the waiver converts the guaranteed payment into a contingent one.²

The waiver doesn’t have to cover the entire compensation package. A corporation can put specific pieces of an executive’s deal on the ballot while paying other components regardless of the outcome. If an executive is entitled to accelerated stock options, a cash bonus, and severance, the company might submit only the bonus for approval. So long as the disclosure clearly identifies which payments will be made no matter what, and the voted-on component clears 75%, that specific payment is exempt.² Companies often isolate the largest penalty-generating component and leave smaller items outside the vote.

Disclosure to Shareholders

The vote is meaningless without proper disclosure. Every person entitled to vote must receive adequate information about all payments that would be parachute payments absent the waiver.¹

The materials have to include the dollar amounts of the payments at stake, the events that would trigger them, and the tax consequences that would follow without approval. The standard is a full and truthful presentation of material facts, plus any additional context needed to keep the disclosure from being misleading. An omitted fact is material if a reasonable shareholder would likely view it as important in deciding how to vote.²

Producing the disclosure means calculating a base amount for each disqualified individual using historical W-2 or equivalent compensation data, then working out the excess parachute payment figure shareholders will see. If the individual worked at the company for fewer than five full years, the base amount is averaged over the shorter period, with partial-year compensation annualized (one-time items like signing bonuses are not multiplied during annualization).²

The regulations don’t set a minimum number of days between disclosure and the vote. They require only that disclosure precede the vote. Companies typically build in review time anyway, because a later challenge to disclosure adequacy can unravel the exemption after the fact.

Running the Vote

Approval requires more than 75% of the voting power of all outstanding shares entitled to vote immediately before the change in control.¹ Several mechanics make the threshold harder to hit than the number suggests.

Unvoted shares count against approval. The denominator is all outstanding voting shares, not only shares actually cast. A shareholder who doesn’t vote is in the denominator but not the numerator, functioning as a “no.” If 80% of shares vote and 90% of those vote yes, only 72% of the outstanding total approves, which fails.²

Shares held by the disqualified individuals receiving the payments are excluded from both sides of the fraction. Section 318 constructive ownership applies here as well, so stock attributed to a disqualified individual through family or entity relationships is likewise excluded.² This shrinks both the pool of eligible voters and the total needed for 75%.

The parachute vote has to be separate from the vote on the transaction itself. The regulations specifically prohibit making approval of the change in control contingent on approval of the parachute payments. Linking the two votes voids the exemption.²

The record date for who is eligible to vote can be set at any point within the six months immediately before the change in control, provided the disclosure requirements are satisfied.²

After the Vote

If shareholders approve, the 20% excise tax and the lost deduction are eliminated for the approved payments. The executive receives the money and the corporation deducts it as ordinary compensation.¹

If shareholders reject, the waiver takes effect and the executive forfeits the voted-on amount, or returns it if already paid. There’s no partial outcome for that component. Any payments left off the ballot proceed under their own terms, but remain subject to their own 280G analysis.

Either way, the company should paper the result carefully. Corporate minutes or written consents documenting the date of the vote, the specific approval percentage, and the shares excluded under the disqualified-individual rule become the file the IRS reviews on audit and the file a future buyer reviews in due diligence.

If the waiver isn’t used or fails and excess parachute payments are made anyway, the reporting shifts. For independent contractors, excess golden parachute payments go on Form 1099-NEC in Box 3, with total compensation reported in Box 1.⁴ For employees, the 20% excise tax under Section 4999 is the executive’s personal liability.³ Some employment agreements shift that tax to the company through a gross-up, but the gross-up payments are themselves subject to 280G, and each additional payment to cover the prior tax generates its own excess. Model the full cost before agreeing to one.

1
Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments
2
eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments
3
Office of the Law Revision Counsel. 26 USC 4999 – Golden Parachute Payments
4
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC