The 20% excise tax will apply to the parachute payments. The most common way private companies mitigate it is following the process in the Section 280G regulations to obtain shareholder approval of these payments. This generally includes all of the following:
The individuals waiving their right to the payments, meaning subjecting payments they’re otherwise entitled to receive is to be up for vote by the shareholders
The details of the payments being disclosed to all shareholders
At least 75% of shareholders, excluding those with excess parachute payments, approving the payments
There are also times when obtaining the 75% approval from shareholders may not be possible or practical. For example, when there are several individual shareholders and management doesn’t feel confident enough individuals will approve the payments.
In this case, the individual may benefit from giving up a portion of the payments or having a clawback provision in payment agreements, so they won’t have excess parachute payments.
For example, if a disqualified individual had a base amount of $100, three times the base amount would be $300. If that individual was entitled to $320 of payments, $220 would be subject to the 20% excise tax, which would be $44.
Alternatively, if the individual could give up their rights to $21 of that payment such that the payments received were $299, the excise tax wouldn’t apply, and the individual would end up with more net cash.