Executive Severance $1M+ — Section 280G & 37% Withholding

Who this applies to

Negotiating executive severance near or above $1 million requires planning around two separate federal tax regimes: IRC § 280G golden parachute rules (which apply only when severance is contingent on a change in corporate ownership or control) and the supplemental-wage withholding shift from 22% to 37% that kicks in once cumulative supplemental wages for the year exceed $1 million. A pure layoff with no change-of-control trigger is not subject to § 280G at all — only payments contingent on the ownership event fall within the statute. Understanding which regime applies, and how to structure payments to avoid costly cliffs, is the central challenge of executive severance negotiation.

What changes for you

Under IRC § 280G, a payment is a "parachute payment" only if it is contingent on a change in ownership or effective control of the corporation. The threshold that triggers the full golden parachute regime is 3× the executive's "base amount" — the average W-2 compensation from the corporation over the preceding five taxable years. If total contingent payments equal or exceed 3× the base amount, every dollar above 1× the base amount becomes an "excess parachute payment": the corporation loses its tax deduction for those amounts under § 280G, and the executive owes a non-deductible 20% excise tax on them under § 4999, stacked on top of ordinary income tax. Payments can be reduced to stay just below 3× the base amount (a "cutback"), or, where the economics justify it, some agreements include a gross-up clause — though gross-ups have become less common following heightened scrutiny. Separately, IRC § 3402 and IRS Publication 15 (2026) impose a two-tier supplemental withholding rule that applies to all executives regardless of whether a change of control is involved. The first $1 million of cumulative supplemental wages paid to an employee in a calendar year is withheld at 22%; amounts above $1 million are withheld at the top marginal rate of 37%. Severance counts as supplemental wages, so an executive receiving a $1.5M lump sum who has already earned their base salary in the same year may face 37% withholding on a substantial portion of the payment. This is a withholding timing difference, not a new tax liability — actual tax owed is settled at filing — but it affects cash flow and estimated-tax planning. Finally, if severance is paid in installments or delayed beyond normal payroll cycles, IRC § 409A governs timing. Plans that fail § 409A expose the executive to immediate income inclusion plus a 20% additional tax and interest. The "short-term deferral" exception under 26 C.F.R. § 1.409A-1(b)(4) shields payments made within 2½ months after the close of the taxable year in which the right to payment vested.

Decision tree

1. If Your total compensation tied to a change in control reaches or exceeds 3× your 5-year average W-2 base compensation

   Then → Section 280G is triggered: the excess over 1× base amount is non-deductible to the company and subject to a 20% excise tax (§ 4999) on the recipient. Structure or "scrub" before signing.

   Else: § 280G doesn't apply; standard supplemental withholding governs.

2. If Your cumulative supplemental wages for the year (including severance) will exceed $1,000,000

   Then → Federal withholding on the amount above $1M is 37% instead of 22%. Plan estimated tax accordingly.

   Else: Standard 22% federal supplemental withholding applies.

3. If Severance is deferred or paid in installments crossing tax years

   Then → IRC § 409A applies; non-compliance triggers a 20% additional tax plus interest on the recipient. Get a § 409A opinion before signing.

   Else: Standard timing rules apply; less risk on the deferred-comp side.

Calculate your numbers

Inputs default to federal assumptions; adjust to your specifics.

Action steps

• Determine whether your severance is contingent on a change in ownership or control — if not, § 280G does not apply, and you can skip the parachute analysis entirely.
• Calculate your "base amount" (five-year average W-2 compensation from the company) and compare total contingent payments to the 3× threshold; consider a cutback if you are close to the cliff.
• Model the 37% withholding impact if your total supplemental wages for the year will exceed $1 million — coordinate with your tax advisor on estimated-tax payments to avoid an underpayment penalty.
• If severance is paid in installments, confirm each payment date falls within the § 409A short-term deferral window (2½ months after year of vesting) or that the schedule complies with a § 409A-compliant fixed schedule.
• In a group reduction in force, confirm the 45-day OWBPA consideration period is provided before signing any waiver of age-discrimination claims.
• Have a tax attorney or CPA experienced in executive compensation review the term sheet before signing — golden parachute and 409A errors are difficult to unwind after closing.

FAQ

Does § 280G apply to all executive severance packages?

No. Section 280G applies only to payments contingent on a change in ownership or effective control of the corporation. If you are laid off in a standard reduction in force with no merger, acquisition, or ownership event involved, § 280G does not apply to your severance regardless of the dollar amount.

How is the base amount calculated for the golden parachute test?

The base amount is your average annual W-2 compensation from the corporation over the five taxable years ending before the change of control. If you have been with the company fewer than five years, the average covers your full tenure. The 3× threshold is three times that average.

What happens if my severance slightly exceeds 3× my base amount?

Every dollar above 1× the base amount becomes an "excess parachute payment." The corporation loses its tax deduction for those amounts and you owe a non-deductible 20% excise tax under § 4999 on top of ordinary income tax. Many executives negotiate a cutback to keep total payments just below the 3× threshold when the excise tax would exceed the benefit of the extra dollars.

Why does the withholding rate jump to 37% when my severance exceeds $1 million?

IRS Publication 15 (2026) requires employers to withhold at the mandatory flat 37% rate on supplemental wages paid above $1 million in cumulative supplemental wages during the calendar year. The 22% rate applies below that threshold. The difference is a withholding timing issue, not an extra tax — your actual liability is determined at filing — but it reduces the lump-sum cash you receive.

What are the risks of receiving severance in installments rather than a lump sum?

Installment severance that does not qualify for the § 409A short-term deferral exception must comply with § 409A's strict timing rules. A plan that fails § 409A causes all deferred amounts to become immediately taxable, triggers a 20% additional tax, and adds interest at the underpayment rate plus 1 point. The short-term deferral safe harbor requires each installment to be paid within 2½ months after the close of the taxable year of vesting.

How long do I have to consider a severance agreement in a group layoff?

Under OWBPA, if two or more employees are laid off as part of the same program, the employer must provide at least 45 days to consider any waiver of age-discrimination claims before signing. Individual terminations carry a 21-day window. You also retain 7 days to revoke after signing, regardless of group size.

How is the "base amount" for § 280G calculated?

The base amount is the recipient's average annualized includible W-2 compensation over the 5 taxable years preceding the year of the change in control (or the period employed if shorter than 5 years). It includes salary, bonuses, and other W-2 compensation actually paid — but excludes ISO exercises and certain non-qualified deferred comp. Treasury Reg. § 1.280G-1, Q&A 34 governs the calculation.

Can my company "gross up" the § 280G excise tax for me?

Sometimes — but corporate-governance trends and ISS/Glass Lewis guidance have made § 280G gross-ups increasingly disfavored. Many public companies have policies against new gross-ups for executives. If your agreement does include a gross-up, the company calculates an additional payment that, after the 20% excise tax and ordinary income tax on the gross-up itself, leaves you whole — meaningful only for very large parachute payments.

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