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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations is vested and the date that, absent the acceleration, the payment would have been vested. This paragraph f4ii applies to the accelerated vesting of a payment in the nature of compensation even if the time when the payment is made is not accelerated. In that case, the value of the lapse of the obligation to continue to perform services is one percent of the present value of the future payment multiplied by the number of full months between the date that the individuals right to receive the payment is vested and the date that, absent the acceleration, the payment would have been vested.
iii Accelerated vesting of equity compensation. For purposes of this paragraph f4, the acceleration of the vesting of a stock option or stock appreciation right or similar arrangement or the lapse of a restriction on restricted stock or a restricted stock unit or a similar arrangement is considered to significantly increase the value of the payment.
5 Application to benefits under a nonqualified deferred compensation plan. In the case of a payment of benefits under a nonqualified deferred compensation plan, paragraph f3 of this section applies to the extent benefits under the plan are vested without regard to the involuntary separation from employment, but the payment of benefits is accelerated due to the involuntary separation from employment. Paragraph f4 of this section applies to the extent benefits under the plan are subject to the conditions described in paragraph f4i of this section. For any other payment of benefits under a nonqualified deferred compensation plan such as a contribution made due to the employees involuntary separation from employment, the full amount of the payment is contingent on the employees separation from employment.
6 Present value. For purposes of this paragraph f, the present value of a payment is determined based on the payment date absent the acceleration and the date on which the accelerated payment is scheduled to be made. The amount that is treated as contingent on the separation from employment is the amount by which the present value of the accelerated payment exceeds the present value of the payment absent the acceleration.
7 Examples. See 1.280G Q/A24f for examples that may be applied by analogy to illustrate the rules of this paragraph f.
g Three-times-base-amount test for parachute payments1 In general. To determine whether payments in the
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nature of compensation made to a covered employee that are contingent on the covered employee separating from employment with the ATEO are parachute payments, the aggregate present value of the payments must be compared to the individuals base amount. To do this, the aggregate present value of all payments in the nature of compensation that are made or to be made to or for the benefit of the same covered employee by an ATEO or any predecessor of the ATEO or related organization and that are contingent on the separation from employment must be determined. If this aggregate present value equals or exceeds the amount equal to 3-times the individuals base amount, the payments are parachute payments. If this aggregate present value is less than the amount equal to 3-times the individuals base amount, the payments are not parachute payments.
See paragraphs f6, h, i, and j of this section for rules on determining present value.
2 Examples. The following examples illustrate the rules of this paragraph g.
For purposes of these examples, assume any entity referred to as ATEO is an ATEO.
i Example 1 Parachute payment A Facts. Employee A is a covered employee and an HCE of ATEO 1.
Employee As base amount is $200,000.
Payments in the nature of compensation that are contingent on a separation from employment with ATEO 1 totaling $800,000 are made to Employee A on the date of Employee As separation from employment.
B Conclusion. The payments are parachute payments because they have an aggregate present value at the time of the separation from employment of $800,000, which is at least equal to 3times Employee As base amount of $200,000 3 $200,000 = $600,000.
ii Example 2 No parachute paymentA Facts. Assume the same facts as in paragraph g2i of this section Example 1, except that the payments contingent on Employee As separation from employment total $580,000.
B Conclusion. Because the aggregate present value of the payments $580,000 is not at least equal to 3times Employee As base amount $600,000, the payments are not parachute payments.
h Calculating present value1 In general. Except as otherwise provided in this paragraph h, for purposes of determining if a payment contingent on a separation from employment exceeds 3-times the base amount, the present value of a payment is determined as of the date of the separation from
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employment or, if the payment is made prior to that date, the date on which the payment is made.
2 Deferred payments. For purposes of determining whether a payment is a parachute payment, if a payment in the nature of compensation is the right to receive payments in a year or years subsequent to the year of the separation from employment, the value of the payment is the present value of the payment or payments calculated on the basis of reasonable actuarial assumptions and using the applicable discount rate for the present value calculation that is determined in accordance with paragraph i of this section.
3 Health care. If the payment in the nature of compensation is an obligation to provide health care including an obligation to purchase or provide health insurance, then, for purposes of this paragraph h and for applying the 3times-base-amount test under paragraph g of this section, the present value of the obligation is calculated in accordance with generally accepted accounting principles. For purposes of paragraph g of this section and this paragraph h, the obligation to provide health care is permitted to be measured by projecting the cost of premiums for health care insurance, even if no health care insurance is actually purchased. If the obligation to provide health care is made in coordination with a health care plan that the employer makes available to a group, then the premiums used for purposes of this paragraph h3 may be the allocable portion of group premiums.
i Discount rate. Present value generally is determined by using a discount rate equal to 120 percent of the applicable Federal rate determined under section 1274d and the regulations in part 1 under section 1274d, compounded semiannually.
The applicable Federal rate to be used is the Federal rate that is in effect on the date as of which the present value is determined, using the period until the payment is expected to be made as the term of the debt instrument under section 1274d. See paragraph h of this section for rules with respect to the date as of which the present value is determined. However, for any payment, the employer and the covered employee may elect to use the applicable Federal rate that is in effect on the date on which the parties entered into the contract that provides for the payment if that election is set forth in writing in the contract.
j Present value of a payment to be made in the future that is contingent on an uncertain future event or condition
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