Tax gross-ups make parachutes more golden.The battle to retain talent in a tight labor market labor market A place where labor is exchanged for wages; an LM is defined by geography, education and technical expertise, occupation, licensure or certification requirements, and job experience and the consolidation trend that continues in many sectors of the economy are responsible for the popularity of "golden parachute golden parachute, a contract given to top executives of a corporation to provide benefits in case of job loss due to a takeover by another firm or a merger. The unusually generous benefits may include substantial severance pay, a one-time bonus payment when " provisions for top executives. A study of 350 corporations revealed that 64% of them provided financial protection for one or more key executives in 1997 in the event there was a change in company control. Golden parachutes, however, have significant tax implications for both the company and the executive. If a parachute payment exceeds a certain threshold, the executive who receives the payment is subject to a 20% excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. in addition to his or her regular income tax. Also, the portion of the parachute payment above the threshold amount is not deductible by the company as compensation to the employee. Companies have several alternatives when it comes to providing the payments and dealing with the taxes thus generated, said Howard Golden of the New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of office of William M. Mercer, which had conducted the study. The two most popular tax approaches for golden parachutes are * The cutback cut·back n. 1. A decrease; a curtailment: "The political effects of food cutbacks could be devastating" New York Times. 2. approach. The company pays the employee up to the threshold. In such cases, the company can deduct the full amount of the parachute payment and the employee is not subject to any excise taxes. The employee, however, may receive less additional compensation if this approach is used. * The gross-up approach. The company absorbs the nondeductibility of the amount of the payment above the threshold. In addition, the company increases (grosses up) the payment to the employee to compensate for excise taxes. "Gross-ups are moving forward as the design method of choice," Golden said. His observation was corroborated cor·rob·o·rate tr.v. cor·rob·o·rat·ed, cor·rob·o·rat·ing, cor·rob·o·rates To strengthen or support with other evidence; make more certain. See Synonyms at confirm. by the results of the study. It showed that nearly two-thirds of the companies that had golden parachutes used tax gross-up features to compensate executives for the additional tax exposure that resulted from the parachute payments. How does Uncle Sam feel about these gross-ups? According to Golden, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. is neutral on the subject. "Either way, the IRS doesn't suffer a loss," he said. |
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