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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
1 Treatment based on the estimated probability of payment. In certain cases, it may be necessary to apply the 3times-base-amount test to a payment that is contingent on separation from employment at a time when the aggregate present value of all the payments is uncertain because the time, amount, or right to receive one or more of the payments is also contingent on the occurrence of an uncertain future event or condition. In that case, the employer must reasonably estimate whether it will make the payment. If the employer reasonably estimates there is a 50-percent or greater probability that it will make the payment, the full amount of the payment is considered for purposes of the 3-times-base-amount test and the allocation of the base amount. If the employer reasonably estimates there is a less than 50-percent probability that the payment will be made, the payment is not considered for either purpose.
2 Correction of incorrect estimates. If an ATEO later determines that an estimate it made under paragraph j1
of this section was incorrect, it must reapply the 3-times-base-amount test to reflect the actual time and amount of the payment. In reapplying the 3-timesbase-amount test and, if necessary, reallocating the base amount, the ATEO
must determine the aggregate present value of payments paid or to be paid as of the date described in paragraph h of this section using the discount rate described in paragraph i of this section. This redetermination may affect the amount of any excess parachute payment for a prior taxable year.
However, if, based on the application of the 3-times-base-amount test without regard to the payment described in this paragraph j, an ATEO has determined it will pay an employee an excess parachute payment or payments, then the 3-times-base-amount test does not have to be reapplied when a payment described in this paragraph j is made or becomes certain to be made if no base amount is allocated to that payment under 53.49604d5.
3 Initial option value estimate. To the extent provided in published guidance of general applicability under 601.601d2, an initial estimate of the value of an option subject to paragraph c of this section is permitted to be made, with the valuation subsequently redetermined and the 3-times-baseamount test reapplied. Until guidance is published under section 4960, published guidance of general applicability described in 601.601d2 that is issued under section 280G applies by analogy.

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4 Examples. See 1.280G1, Q/A
33d for examples that may be applied by analogy to illustrate the rules of this paragraph j.
k Base amount1 In general. A
covered employees base amount is the average annual compensation for services performed as an employee of the ATEO including compensation for services performed for a predecessor of the ATEO, and/or, if applicable, a related organization, with respect to which there has been a separation from employment, if the compensation was includible in the gross income of the individual for taxable years in the base period including amounts that were excluded under section 911 or that would have been includible in the individuals gross income if the individual had been a United States citizen or resident. See paragraph l of this section for the definition of base period and for examples of base amount computations.
2 Short or incomplete taxable years.
If the base period of a covered employee includes a short taxable year or less than all of a taxable year of the employee, compensation for the short or incomplete taxable year must be annualized before determining the average annual compensation for the base period. In annualizing compensation, the frequency with which payments are expected to be made over an annual period must be taken into account. Thus, any amount of compensation for a short or incomplete taxable year that represents a payment that will not be made more often than once per year is not annualized.
3 Excludable fringe benefits.
Because the base amount includes only compensation that is includible in gross income, the base amount does not include certain items that may constitute parachute payments. For example, payments in the form of excludable fringe benefits or excludable health care benefits are not included in the base amount but may be treated as parachute payments.
4 Section 83b income. The base amount includes the amount of compensation included in income under section 83b during the base period.
l Base period1 In general. The base period of a covered employee is the covered employees 5 most-recent taxable years ending before the date on which the separation from employment occurs. However, if the covered employee was not an employee of the ATEO for this entire 5-year period, the individuals base period is the portion of the 5-year period during which the covered employee performed services
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for the ATEO, a predecessor, or a related organization.
2 Determination of base amount if employee separates from employment in the year hired. If a covered employee commences services as an employee and experiences a separation from employment in the same taxable year, the covered employees base amount is the annualized compensation for services performed for the ATEO or a predecessor or related organization that was not contingent on the separation from employment and either was includible in the employees gross income for that portion of the employees taxable year prior to the employees separation from employment including amounts that were excluded under section 911 or would have been includible in the employees gross income if the employee had been a United States citizen or resident.
3 Examples. The following examples illustrate the rules of paragraph k of this section and this paragraph l. For purposes of these examples, assume any entity referred to as ATEO is an ATEO, any entity referred to as CORP
is not an ATEO, and all employees are HCEs of their respective employers.
i Example 1 Calculation with salary deferralsA Facts. Employee A, a covered employee of ATEO 1, receives an annual salary of $500,000 per year during the 5-year base period. Employee A defers $100,000 of salary each year under a nonqualified deferred compensation plan none of which is includible in Employee As income until paid in cash to Employee A.
B Conclusion. Employee As base amount is $400,000 $400,000 5/5.
ii Example 2 Calculation for lessthan-5-year base periodA Facts.
Employee B, a covered employee of ATEO 1, was employed by ATEO 1 for 2 years and 4 months preceding the year in which Employee B separates from employment. Employee Bs compensation includible in gross income was $100,000 for the 4-month period, $420,000 for the first full year, and $450,000 for the second full year.
B Conclusion. Employee Bs base amount is $390,000 3 $100,000 +
$420,000 + $450,000/3. Any compensation Employee B receives in the year of separation from employment is not included in the base amount calculation.
iii Example 3 Calculation for lessthan-5-year base period with signing bonusA Facts. Assume the same facts as in paragraph l3iiA of this section Example 2, except that Employee B also received a $60,000
signing bonus when Employee Bs
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