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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations paragraph d2. For purposes of these examples, assume any entity referred to as ATEO is an ATEO and all employees are HCEs of their respective employers.
A Example 1 Compensation from related organizations1 Facts. ATEO
1 and ATEO 2 are related organizations.
Employee A is a covered employee of ATEO 1 and an employee of ATEO 2
who has an involuntary separation from employment with ATEO 1 and ATEO 2.
Employee As base amount is $200,000
with respect to ATEO 1 and $400,000
with respect to ATEO 2. A receives $1
million from ATEO 1 contingent upon Employee As involuntary separation from employment from ATEO 1 and $1
million from ATEO 2 contingent upon Employee As involuntary separation from employment from ATEO 2.
2 Conclusion. Employee A has a base amount of $600,000 $200,000 +
$400,000. The two $1 million payments are parachute payments because their aggregate present value is at least 3times Employee As base amount 3
$600,000 = $1.8 million. The portion of the base amount allocated to each parachute payment is $300,000 $1
million/$2 million $600,000. Thus, the amount of each excess parachute payment is $700,000 $1
million$300,000.
B Example 2 Multiple parachute payments1 Facts. Employee B is a covered employee of ATEO 3 with a base amount of $200,000 who is entitled to receive two parachute payments: One of $200,000 and the other of $900,000.
The $200,000 payment is made upon separation from employment, and the $900,000 payment is to be made on a date in a future taxable year. The present value of the $900,000 payment is $800,000 as of the date of the separation from employment.
2 Conclusion. The portion of the base amount allocated to the first payment is $40,000 $200,000 present value of the parachute payment/$1
million present value of all parachute payments $200,000 total base amount and the portion of the base amount allocated to the second payment is $160,000 $800,000 present value of the parachute payment/$1 million present value of all parachute payments $200,000 total base amount. Thus, the amount of the first excess parachute payment is $160,000
$200,000$40,000 and that the amount of the second excess parachute payment is $740,000
$900,000$160,000.
3 Reallocation when the payment is disproportionate to base amount. In accordance with section 4960d, the Commissioner may treat a parachute
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payment as paid by an ATEO if the facts and circumstances indicate that the ATEO and other payors of parachute payments structured the payments in a manner primarily to avoid liability under section 4960. For example, if an ATEO would otherwise be treated as paying a portion of an excess parachute payment in an amount that is materially lower in proportion to the total excess parachute payment than the proportion that the amount of average annual compensation paid by the ATEO or any predecessor during the base period bears to the total average annual compensation paid by the ATEO or any predecessor and any related organization or organizations, and the lower amount is offset by payments from a non-ATEO or an unrelated ATEO, this may indicate that that the parachute payments were structured in a manner primarily to avoid liability under section 4960.
4 Election to prepay tax. An ATEO
may prepay the excise tax under paragraph a1 of this section on any excess parachute payment for the taxable year of the separation from employment or any later taxable year before the taxable year in which the parachute payment is actually or constructively paid. However, an employer may not prepay the excise tax on a payment to be made in cash if the present value of the payment is not reasonably ascertainable under 31.3121v21e4 or on a payment related to health coverage. Any prepayment must be based on the present value of the excise tax that would be due for the taxable year in which the employer will pay the excess parachute payment, and be calculated using the discount rate equal to 120
percent of the applicable Federal rate determined under section 1274d and the regulations in part 1 under section 1274 and the tax rate in effect under section 11 for the year in which the excise tax is paid. For purposes of projecting the future value of a payment that provides for interest to be credited at a variable interest rate, the employer may make a reasonable assumption regarding the variable rate. An employer is not required to adjust the excise tax paid merely because the actual future interest rates are not the same as the rate used for purposes of projecting the future value of the payment.
5 Liability after a redetermination of total parachute payments. If an ATEO
determines that an estimate made under 53.49603j1 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,
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reallocating the base amount, the ATEO
must determine the correct base amount allocable to any parachute payment paid in the taxable year. See 1.280G1, Q/
A33d for examples that may be applied by analogy to illustrate the rules of this paragraph d5.
6 Examples. The following examples illustrate the rules of this paragraph d.
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 Excess parachute payment paid by a non-ATEOA
Facts. ATEO 1 and CORP 1 are related organizations that are treated as the same employer for purposes of 53.49603e3 defining separation from employment and are both calendar year taxpayers. For 2022
through 2026, ATEO 1 and CORP 1 each pay Employee A $250,000 of compensation per year for services performed as an employee of each organization $500,000 total per year. In 2027, ATEO 1 and CORP 1 each pay Employee A $1 million payment $2
million total that is contingent on Employee As separation from employment with both ATEO 1 and CORP 1, all of which is remuneration, and no other compensation. Employee A is a covered employee of ATEO 1 in 2027.
B Conclusion. Employee As base amount in 2027 is $500,000 Employee As average annual compensation from both ATEO 1 and CORP 1 for the previous 5 years. ATEO 1 makes a parachute payment of $2 million in 2027, the amount paid by both ATEO 1
and CORP 1 that is contingent on Employee As separation from employment with ATEO 1 and all organizations that are treated as the same employer under 53.49603e3.
Employee As $2 million payment exceeds 3-times the base amount $1.5
million. ATEO 1 makes a $1.5 million excess parachute payment the amount by which $2 million exceeds the $500,000 base amount. However, ATEO
1 is liable for tax only on the excess parachute payment paid by ATEO 1 $1
million parachute payment$250,000
base amount = $750,000 that is subject to tax under 53.49604a. CORP 1 is not liable for tax under 53.49604a in 2027.
ii Example 2 Election to prepay tax on excess parachute payments and effect on excess remunerationA
Facts. Employee B is a covered employee of ATEO 2 with a base amount of $200,000 who is entitled to receive two parachute payments from ATEO 2, one of $200,000 and the other
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