Which statement best describes a golden parachute plan?

Which statement best describes a golden parachute plan?

• A. A golden parachute plan is an arrangement that provides a severance benefit to a valued employee conditioned on the sale or substantial change in ownership of the company and the subsequent termination of the employee.
• B. A golden parachute plan provides retirement benefits in addition to those provided by the employer's profit sharing plan.
• C. The payments consist solely of monetary awards.
• D. The parachute payment is always subject to a 20% penalty.

Answer: (A)

Golden parachute plans are severance arrangements for executives that kick in when there is a change in control of the company, and the executive is terminated or forced to leave as a result. This is exactly what the described statement conveys: a severance benefit conditioned on a sale or substantial change in ownership and the subsequent termination. Why the other ideas don’t fit: retirement benefits beyond the employer’s profit-sharing plan aren’t about a change in control or termination tied to a sale, so that describes a different kind of benefit. Payments described as solely monetary ignore the possibility of other components that can be part of a parachute package (like accelerated vesting). And the notion of a universal 20% penalty isn’t accurate—the 20% excise tax on parachute payments applies only to the portion deemed excess under specific tax rules, not to every payment.

Golden parachute plans are severance arrangements for executives that kick in when there is a change in control of the company, and the executive is terminated or forced to leave as a result. This is exactly what the described statement conveys: a severance benefit conditioned on a sale or substantial change in ownership and the subsequent termination.

Why the other ideas don’t fit: retirement benefits beyond the employer’s profit-sharing plan aren’t about a change in control or termination tied to a sale, so that describes a different kind of benefit. Payments described as solely monetary ignore the possibility of other components that can be part of a parachute package (like accelerated vesting). And the notion of a universal 20% penalty isn’t accurate—the 20% excise tax on parachute payments applies only to the portion deemed excess under specific tax rules, not to every payment.