Section 280G Clause
(Valley or Net-Best Cutback)

Summary

You can use these valley provision clauses in compensation arrangements to impose provisional reductions to change-in-control related payments to the extent necessary to avoid triggering the excess parachute payment penalties under I.R.C. §§ 280G and 4999 (collectively, Section 280G). Cutback provisions are frequently used in change-in-control, employment, or other compensation agreements with executives (and others potentially subject to Section 280G) that do not provide for Section 280G gross-ups. Valley cutback provisions (also called net-best or better-off cutback provisions) only apply the cutback if to do so puts the executive (or other disqualified individual) in a better after-tax position than would result if the executive had received the parachute payments in full and paid the Section 280G excise tax. Thus, valley cutbacks are less favorable to companies than basic safe harbor cutbacks, which reduce the parachute payments regardless of the after-tax effect on the executive (thereby avoiding the company's loss of the compensation deduction on excess parachute payments). The form also includes provisions addressing determinations, adjustments, and other considerations. For a full listing of key content covering executive employee agreement considerations, see Executive Employment Agreement Resource Kit. For language illustrating alternative approaches to handling Section 280G concerns in compensation arrangements, see Section 280G Clause (Safe Harbor Cutback), Section 280G Clause (Basic Gross-Up), and Section 280G Clause (Conditional Gross-Up). For more information on this topic, see Sections 280G and 4999 Parachute Payment Rules. For a general practice note on change-in-control agreements and accompanying annotated form, see Change-in-Control Arrangement Drafting Considerations and Change-in-Control Agreement. For a full listing of key content covering executive compensation issues related to I.R.C. Sections 280G and 4999, see Section 280G Resource Kit.