Equias Alliance is in the BOLI and benefit plan news often.

How Mergers Can Impact Deferred Compensation Plans Part II

By: David Shoemaker, Becky Pressgrove | December 9th, 2013

Some compensation arrangements can cause headaches during a merger or acquisition or even derail a deal if they trigger the golden parachute rule under the Internal Revenue Code and possibly related excise taxes. So how do you know if your bank has such arrangements? It's best to review compensation plans well ahead of striking a deal with another bank to plan for the possibility of the application of the golden parachuterules, otherwise known as exceeding the §280G limit. This is the second in a two-part series about what constitutes a golden parachute payment and what a bank can do about it. Check out the first article to see what constitutes a parachute payment.

Is there anything the bank can do to avoid the creation of parachute payments in a change of control?

Yes. There are several potential options:

1. Accelerate vesting prior to the change in control (CIC). The bank can accelerate vesting of a Supplemental Executive Retirement Plan (SERP) or some other non-qualified deferred compensation arrangement at least 12 months in advance of the change in control to avoid triggering the "golden parachute- excise taxes. The downside is that the bank would have to accrue a liability for the increase in the vested benefit. In addition, if the executive terminated employment, the bank would be obligated to pay the executive the increased benefit. (This is a positive to the executive but may be a negative to the

2. Classify payments as part of a non-compete. If the executive's separation agreement provides thatthe executive cannot compete with the company for a period of time, then a portion of the paymentsmay be attributable to the non-compete and therefore excludable from the parachute payment amount. There is no bright line test for how much can be excluded as it is based on facts and circumstances. The excludable amount will vary by bank and by individual within a bank. Any amount paid that does not represent reasonable value for the non-compete will be part of the parachute payment.

3. Provide a retention agreement. The buying bank could enter into retention agreements with one or more executives. There is value to the buying bank in retaining key executives for some period of time after the merger to protect its investment. The amount paid to the executive for retention (including salary, bonuses, stock options or other) must represent reasonable compensation for the services rendered or it will be considered a parachute payment.

4. Accelerate income. If it is anticipated that the bank may experience a CIC in the foreseeable future, it could take steps to increase the executive's base amount by accelerating income (through bonuses or the exercise of stock options). In addition, the executive may want to discontinue deferrals under any voluntary deferred compensation plans. Lastly, it may be possible to increase the base amount by terminating the bank's non-qualified deferred compensation arrangements and distributing the proceeds (being careful to follow the guidance under IRC section 409A).

What are the bank's alternatives, when designing a plan, to address §280G?

There are three basic strategies:

1. Cutback. The agreement provides that if the total parachute payments exceed the §280G limit, they willbe reduced so as not to trigger an excise tax.

2. Gross up. The executive is to receive the total payments and the bank will pay the executive additional compensation to cover his excise taxes.

3. Neither cutback nor gross up. The executive receives his payments, even if they trigger an excise tax, but the bank does not cover his excise taxes. This one should include a filter that would cutback the parachute payments if the excise taxes cause the executive to receive less on a net after tax basis.

Do we have to apply the same strategy for all covered executives?

No. As with other nonqualified benefit plans, you can have different CIC provisions for each executive.

What happens after the CIC is completed?

Typically the timing and amount due the executive is paid pursuant to the CIC provisions in the plan agreement. However, Section 409A of the Internal Revenue Code allows the buying bank to terminate the plan and pay a lump sum to each executive in the plan. The buying bank may only do so if it follows the specific criteria detailed in §409A. Boards and executives should take this into consideration in designing or updating their plan.

Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.). IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, we advise you that any tax advice contained in this communication is not intended to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

David Shoemaker, CPA/PFS, CFP®, is a principal of Equias Alliance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOll). To learn more, contact David Shoemaker at 901-754-4924 or dshoemaker@equiasalliance.com.

Becky A. Pressgrove, CPA, is senior vice president and chief operating officer at Equias Alliance. She brings 19-plus years of experience with nonqualified benefit, BOll and COLI programs.

Equias News

Q3 2017 Equias Alliance/Michael White 2017 BOLI Holdings Report
Click here to read more

Compensation Strategies to Attract, Retain and Motivate Millennials – BankDirector
Click here to read more

Top 10 Reasons Banks Own BOLI – Joe Schaefer, MBA
Click here to read more

More Equias News

Current Events

Ohio Bankers | OBL Economic Summit | February 6 | Greater Columbus Convention Center, Columbus, OH

American Bankers Association | National Conference for Community Bankers | February 25 - February 28 | Hilton Hawaiian Village Waikiki Beach Resort, Honolulu, HI

More Current Events



Insurance services provided by Equias Alliance, LLC, a subsidiary of NFP Corp. Doing business in California as Equias Alliance Insurance Services, LLC (License #0H52337). Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Kestra IS is not affiliated with Equias Alliance LLC, NFP Corp., or any other entity listed herein. Kestra IS does not provide tax or legal advice and is not a Certified Public Accounting (CPA) firm. Not all persons listed on this website are registered with or offer securities through Kestra IS. Only appropriately licensed individuals can offer securities through Kestra IS.

This site is published for residents of the United States only. Registered Representatives of Kestra IS and Investment Advisor Representatives of Kestra AS may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact our Compliance department at 844-5-KESTRA (844-553-7872).

Any web site links referenced are being provided strictly as a courtesy. Neither us, nor Kestra IS or Kestra AS are liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of the links provided.

Equias Privacy Policy

butten linkedin

Consultant Login

Copyright ©2018 Equias Alliance. All rights reserved.