A best-net provision under Section 280G is a clause in an executive employment or severance agreement that runs an automatic comparison when a change in corporate control triggers the golden parachute rules: it pays you either the full contract amount (after you absorb the 20% excise tax and ordinary income taxes) or a payment reduced to just below the parachute threshold (with no excise tax), whichever leaves more money in your hands after tax. You do not choose. The clause chooses for you, based on the math. Roughly 77% of companies now use this structure in place of the older excise tax gross-up, so if you are negotiating a change-in-control package today, this is very likely the mechanism sitting in your draft.
The Two Scenarios the Clause Compares
Everything about a best-net provision comes down to two calculations run side by side.
Scenario A: Take the Full Payment
You receive every dollar your contract provides. From the gross, subtract federal income tax, applicable state and local income taxes, Medicare tax, and the 20% Section 4999 excise tax on the excess parachute payment. The excise tax itself is not deductible, which makes the effective rate especially punishing. Combined tax rates above 60% are common. What remains is your after-tax number.
Scenario B: Cut Back to the Safe Harbor
Your total payments are reduced to one dollar less than three times your base amount, keeping you just below the parachute threshold.1Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments No excise tax applies, and only ordinary income and payroll taxes come off the top. You get less gross, but you keep more of each dollar.
Whichever produces the larger after-tax number wins. If your payments only slightly exceed three times your base amount, the cutback almost always wins, because the excise tax on the excess wipes out more than the small amount forfeited. If your payments substantially exceed the threshold, taking the full amount and absorbing the excise usually wins. The crossover point depends on your specific federal, state, and local rates.
Why the Clause Exists: The 280G Cliff
Section 280G creates a two-sided penalty when change-in-control payments to certain executives grow too large. A “parachute payment” is compensation contingent on a change in corporate ownership or control whose total present value reaches or exceeds three times the executive’s base amount, a measure of historical average pay.1Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments Cross that line and two things happen at once.
The executive owes a 20% excise tax on the “excess parachute payment,” which is the total payout minus one times the base amount allocated to it.2Office of the Law Revision Counsel. 26 USC 4999 – Golden Parachute Payments The corporation loses its tax deduction for the entire excess portion.1Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments
Read the numbers carefully, because they trip people up. Three times the base is the trigger, but one times the base is the dividing line for the excise. If your base amount is $500,000 and your total parachute payments come to $1.6 million, you have crossed the 3x threshold of $1.5 million by only $100,000. The excise, though, applies to $1.1 million (the $1.6 million minus $500,000), not to the $100,000 above the trigger. That cliff is the whole reason best-net provisions exist. A tiny step past the line costs enormously more than the step itself.
When the Clause Can Actually Affect You
Two conditions have to hold before the best-net analysis matters: you have to be a “disqualified individual,” and a qualifying change in control has to occur.
Are You a Disqualified Individual?
Section 280G targets three groups connected to the corporation during the 12-month period ending on the date of the change in control.3eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments Shareholders owning stock worth more than 1% of outstanding shares. Officers (determined by authority and duties, not just title), capped at 50 employees or, if fewer, the greater of 3 or 10% of employees. And the highest-paid 1% of employees, up to 250 people, whose annualized compensation meets the Section 414(q)(1)(B)(i) threshold, which is $160,000 for a change in control occurring in 2026. Independent contractors can also qualify if they meet the shareholder or compensation criteria. If none of these categories fit, Section 280G does not apply to you and a best-net clause in your contract has no practical effect.
Did a Change in Control Occur?
Treasury regulations recognize three triggering events.3eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments One person or group acquires more than 50% of the corporation’s total fair market value or voting power. One person or group acquires 20% or more of the total voting power within a rolling 12-month period. Or one person or group acquires assets worth one-third or more of the corporation’s total gross fair market value within a rolling 12-month period.
Watch for one presumption. Payments made under agreements entered into within one year before the triggering event are presumed contingent on the change unless you can rebut that by clear and convincing evidence.1Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments A raise or new grant signed mid-negotiation can get swept into the parachute total.
What Goes Into the Math
Your Base Amount
The base amount is the benchmark that determines the 3x trigger. It equals your average annualized compensation includible in gross income over the five tax years ending before the change in control.1Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments A common mistake is treating this as identical to W-2 wages; the two can diverge, and excludable fringe benefits do not count toward the base amount even though they may count as parachute payments.3eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments If you have been with the company less than five full years, the calculation uses your actual period of service, with partial years annualized and one-time payments like signing bonuses excluded from the annualization.
Overstating the base amount is where most 280G analyses go wrong. It makes the safe harbor look more generous than it is, and the error usually only surfaces when the IRS looks.
Non-Cash Payments Count Too
The parachute total is not just cash severance. Accelerated vesting of stock options, restricted stock, and performance awards all count to the extent their vesting is triggered or accelerated by the change in control. For stock options, the IRS provides a safe harbor valuation method based on the Black-Scholes model that considers volatility, exercise price, current stock price, and remaining term.4Internal Revenue Service. Revenue Procedure 2003-68 You cannot simply use the spread between the exercise price and the current stock price; that shortcut is explicitly prohibited because it ignores time value and volatility. For private companies without a readily observable stock price, valuation of these items adds real complexity to the analysis.
Ways to Keep Payments Under the Threshold
Because the cliff is so steep, small reductions in the parachute total can eliminate the excise problem entirely, sometimes without touching the cash the executive actually pockets.
Reasonable Compensation for Post-Closing Services
Not every payment tied to a change in control has to count as a parachute payment. If you can show by clear and convincing evidence that a portion of your compensation is reasonable payment for services you will perform after the transaction closes, that portion is excluded from the parachute calculation. The regulations set specific tests. If your duties stay essentially the same, your post-closing pay should not be significantly higher than your pre-closing pay (beyond normal cost-of-living increases). If your role changes, the pay must be in line with what comparable employers pay for comparable work. Payments tied to a covenant not to compete can also qualify, but only if the restriction genuinely limits your ability to work elsewhere and is likely to be enforced.3eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments
Severance is explicitly not treated as reasonable compensation for services, no matter what the agreement calls it, and neither are damages for a company’s failure to make severance payments.3eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments Relabeling severance as “consulting fees” without real consulting services does not work.
The Private-Company Shareholder Vote
Boundary worth knowing: if the corporation’s stock is not readily tradeable on an established securities market, it can exempt payments from Section 280G altogether by getting approval from more than 75% of the voting power of all outstanding stock immediately before the change, with disqualified individuals’ shares excluded from both sides of the ratio.3eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments The vote requires full, truthful disclosure of the triggering event and every payment at issue to all voting shareholders. Publicly traded companies have no equivalent mechanism and must manage 280G exposure through contract structure, reasonable compensation arguments, or the best-net cutback itself.
Why Best-Net Replaced the Gross-Up
Before best-net language became standard, the dominant approach was the excise tax gross-up. The company reimbursed the executive for the entire Section 4999 excise tax plus the additional income tax owed on the reimbursement itself. A $1 million excise liability could cost the company $2 million or more after grossing up the gross-up.
The shift was fast. In 2005, over 50% of the largest public companies offered 280G gross-ups to their CEOs. By 2020, that figure had dropped to roughly 5%. Proxy advisory firms and institutional investors flagged gross-ups as excessive compensation, and the market moved. About 77% of companies now address the excise tax through a best-net provision instead. Best-net costs the company nothing extra: either the executive absorbs the excise, or the payment is trimmed and both the excise and the lost deduction disappear. That is why the clause is now the default, and why any modern change-in-control offer is almost certainly going to include one.
The 409A Ordering Rule to Check in Your Agreement
When a best-net analysis triggers a cutback, payments you expected to receive are being reduced. Section 409A, which governs the timing of deferred compensation, has strict rules about when and how payments can be changed. A cutback structured the wrong way can look like an impermissible acceleration or deferral, triggering a separate 20% penalty under 409A on top of anything happening under 280G.
The fix is an ordering rule in the agreement that specifies which payments are reduced first. A well-drafted best-net provision reduces non-409A payments (cash severance that fits within the short-term deferral rule or the separation pay exception, for example) before touching anything subject to 409A. Without that ordering, the parties can end up arguing about whether the cutback itself was a prohibited change in the time or form of payment. If your agreement contains a best-net clause but no ordering rule, that gap is worth closing before a transaction is on the horizon rather than after one has been announced.