Both employment and separation agreements can have a number of tax ramifications. We have assisted executives in properly drafting and handling compensation provisions so as to avoid unnecessary penalties and surcharges. For example, by altering the proposed timing of certain separation payments, including years’ worth of deferred compensation, our employment attorneys succeeded in saving one financial services executive $3 million in taxes. Without our intervention, he would have owed the IRS a 20% surcharge over and above ordinary income taxes due to legislation originally intended to prevent Enron-type manipulation, but which in fact applies to many ordinary severance arrangements.
Similarly, when a private college or university hires a President or senior administrator, there are potential tax penalties for both the President and the school’s Board of Trustees if base compensation is meaningfully disproportionate to other executives in the President’s peer group. By designing performance-based and other types of incentives for newly hired college and university presidents and senior administrators, our employment attorneys have enhanced already generous compensation packages while avoiding negative tax consequences for executives, companies and institutions.