Common use of The Safe Harbor Clause in Contracts

The Safe Harbor. The Code provides a "safe harbor" of 300% of the executive's base amount (i.e., the excess parachute payment rules do not apply if the aggregate amount of parachute payments is less than three times the executive's base amount). If, however, the parachute payments equal or exceed the safe harbor amount, the entire excess over the base amount will be subject to the excise tax and disallowance of deduction. For example, if an executive has a base amount of $100,000, parachute payments of up to $299,999 will not be subject to the excise tax or the disallowance of deduction, but a parachute payment of $300,000 (only $1 more) will be subject to those rules to the extent of $200,000 (the excess of the parachute payments over the executive's safe harbor). Note that because of this treatment, an individual entitled to parachute payments only slightly in excess of his or her safe harbor amount may be in a better after-tax position if his or her payments are automatically reduced (or "capped") to the safe harbor amount. Such an individual is said to be in the "valley." In the above example, the individual avoids an excise tax of $40,000 (20% of the $200,000 excess parachute payment) merely by having his or her payments reduced by $1.

The Safe Harbor. The Code provides a "“safe harbor" ” of 300% of the executive's ’s base amount (i.e., the excess parachute payment rules do not apply if the aggregate amount of parachute payments is less than three times the executive's ’s base amount). If, however, the parachute payments equal or exceed the safe harbor amount, the entire excess over the base amount will be subject to the excise tax and disallowance of deduction. For example, if an executive has a base amount of $100,000, parachute payments of up to $299,999 will not be subject to the excise tax or the disallowance of deduction, but a parachute payment of $300,000 (only $1 more) will be subject to those rules to the extent of $200,000 (the excess of the parachute payments over the executive's ’s safe harbor). Note that because of this treatment, an individual entitled to parachute payments only slightly in excess of his or her safe harbor amount may be in a better after-tax position if his or her payments are automatically reduced (or "“capped"”) to the safe harbor amount. Such an individual is said to be in the "“valley." ” In the above example, the individual avoids an excise tax of $40,000 (20% of the $200,000 excess parachute payment) merely by having his or her payments reduced by $1.