Salary Cap Accounting Rules

1. What are the salary cap accounting rules for paragraph 5 salaries?

The full amount of a player’s P5 salary is charged to the cap in the year that salary is earned. See below for exceptions to this general rule.

Offseason rules

During the offseason and training camp, teams can have up to 90 players on their rosters. During the regular season, teams are only allowed to have 53 players on their rosters. If teams were forced to fit their entire offseason roster of 90 players under the salary cap, teams would be left with significant room left in the cap when rosters are reduced to 53 before the start of the regular season (the majority of the players cut before the season do not have guaranteed contracts and therefore will not incur a charge against the cap once released).  To avoid this problem, the CBA has a special rule in place for the offseason. The 51 highest-valued contracts, tenders, and offer sheets of a team are charged completely against the cap. The remaining contracts of players on the roster during the offseason are subject to the following rules:

  • Undrafted rookie free agents: Any amount that exceeds the minimum active/inactive list salary is charged to the cap.
  • All other players: Any amount that exceeds twice the applicable minimum active/inactive list salary for that player is charged to the cap.

The player contracts that are not in the top 51 highest-valued contracts are usually minimum contracts, which means that a team will effectively be carrying 51 contracts in the offseason and 53 in the regular season. The rule helps teams effectively manage their cap so that their 53-man roster can occupy as much of their salary cap room as possible.

Deferred salary

Any P5 salary to be earned in a particular year but not to be paid until after the following League Year is known as “deferred salary” and is included in team salary during the League Year earned at its present value based on the discount rate (interest rate of one-year Treasury yields on February 1 of that year). For example, if Aaron Rodgers earns $22 million in the 2016 League Year but will not be paid until April 2018, the $22 million is deferred salary and present valued in 2016, so the final cap number might be $20 million. However, if he were to be paid for the 2016 season in December 2017, that amount would not considered deferred and the full $22 million would be charged to team salary in 2016.

P5/split salary within one season

A player’s salary cap hit will be adjusted if he ends up being subject to his down amount. Let’s assume player X has a salary of $1.7 million ($100,000 for each week of the season) and a down amount of $510,000 ($30,000/week). If he spends five weeks on the active roster and the remainder of the season on injured reserve, he will earn $500,000 ($100,000 x 5) for the first five weeks of the season and $360,000 ($30,000 x 12) for the remainder of the season. The net charge to team salary is $860,000.

Mid-season contract

A player who is signed to an extension mid-season would have a similar split. All weeks played under the old contract would be based on his previous P5 amount, and the weeks played under his new contract would be paid (and affect team salary) based on the new amounts. Players who are traded or waived mid-season have their P5 salary shifted to the new team for the weeks that they are on the new team’s roster. So if player X has a contract for $1.7 million ($100,000/week), and he plays four weeks for team A and then is traded to team B, then $400,000 of his P5 salary will be charged to team A and $1.3 million of his salary will be charged to team B.

Similarly, if a player is signed in mid-season for $1.7 million and plays 10 weeks for the team, his salary is prorated and he would earn $1 million (10 x $100,000). His cap hit would be $1 million as well.

2. How are signing bonuses accounted for under the salary cap?

The total amount of a player’s signing bonus is prorated over the term of a contract on a straight-line basis with a maximum proration of five years. A contract year in which the player has the right to terminate based on events within his sole control is not considered a contract year for purposes of this proration. The proration of player signing bonuses is the main cause for discrepancies between a team’s cap position and cash outlay for any particular League Year.

Contract extension

Any signing bonus given in connection to a contract extension entered into before the expiration of a player’s existing contract is prorated over the remaining years of the unexpired contract together with its extension.

Contract restructure

Teams looking for salary cap relief will often renegotiate with players and convert large P5 salaries into signing bonuses in the new version of the contract, even without extending the contract into future seasons. For example, Ndamukong Suh was scheduled to have a P5 salary of $23.5 million for 2016. To create more cap room, the Dolphins converted $20 million of that P5 salary to a lump-sum bonus during the 2016 offseason. This contract restructure is treated as if Suh signed a new contract for salary cap purposes. The $20 million lump-sum payment is treated as a signing bonus and is therefore allocated over five years, resulting in only $4 million of the signing bonus being charged to the 2016 cap and moving $16 million of the cap hit into future years.

3. What happens if a player is waived or traded before his signing bonus has been completely recognized (amortized) by his team?

If a player who previously received a signing bonus is later waived or traded and is no longer on a team roster before June 1 of any League Year or at any time during the Final League Year (2020), the full amount of the unamortized portion of the signing bonus is (accelerated and) included in team salary for that League Year. If a player is terminated after June 1 (except in the Final League Year), the cap hit is spread over two years as follows: The signing bonus amount that relates to the upcoming season will remain a charge against the current year’s salary cap and all unamortized bonus amounts that apply to all future seasons are included in team salary at the start of the following League Year. If the signing bonus acceleration puts a team over the salary cap, the team will have seven days to conform to the salary cap but may not sign any new players until there is room to do so under the salary cap.

Since the player is no longer on the team, and yet his signing bonus acceleration is on the team’s books, this charge became to be known as “dead money”.

Post-June 1 designation

The CBA allows each team to make two post-June 1 designations a year (except for the Final League Year), so that even if a player is cut before June 1, the team can designate the transaction to have occurred after June 1 and split the cap hit related to the signing bonus over two seasons.

4. What are all the components of dead money?

The acceleration of a signing bonus for a player who is waived or traded is one of the two components that may generate “dead money” related to a player. The other component is future guaranteed salary owed to the player. Any future guaranteed money owed to a player who has been waived accelerates and hits the cap in the League Year in which the player was released. Regarding the acceleration of future guaranteed salary, there is no distinction in terms of the time of the year (e.g., pre-June 1 or post-June 1) that the player was waived (released) or traded. Additionally, even if the future guaranteed money owed relates to multiple seasons, all of the guaranteed money accelerates and is absorbed in the current year’s salary cap.

If a player is traded, the previously unrecognized portion of the signing bonus accelerates. However, as the guaranteed money is now the responsibility of the acquiring team and the original team will not be paying that salary, there will not be a dead money charge related to the future guaranteed salary.

The two components of dead money (signing bonus acceleration and future guaranteed money acceleration) are summed and the total is referred to as the dead money charge related to player X, who is no longer on the team.

In the earlier years of the salary cap, many teams were hamstrung after having signed a number of players to deals with large signing bonuses and guarantees and then releasing them shortly thereafter. This caused the teams to carry a lot of dead money in those subsequent years and limited their ability to field competitive teams since so much of their salary cap was tied up by the dead money of former players.

5. What salary cap charges are incurred by an acquiring team related to the players signing bonus?

Because a player’s old team is responsible for the signing bonus allocation, the new team that obtains the player via waivers or trade will not have any cap charge related to the signing bonus received from the old team. If a player is entitled to a trade bonus, the cash payment and salary cap charge for the bonus may be the responsibility of the old team or new team. It all depends on how the bonus was worded in the contract.

6. How is the signing bonus allocation impacted by contingency years or a contract renegotiation which shorten the contracts term?

Contingency years

A contract year that the player has the right to terminate based upon a contingency is considered a contract year for the purposes of signing bonus proration until the contingency is fulfilled. If some years of the contract indeed terminate due to the fulfillment of the contingency, any amounts attributed to that year (or years) are accelerated and included immediately in team salary. If the acceleration puts a team over its salary cap in any League Year (except the Final League Year), the difference is charged to team salary for the following year. To the extent that such acceleration puts the team over the salary cap in the Final League Year, the team has seven days to conform to the salary cap but may not sign any players until there is room to do so under the salary cap.

Length reduction

If a player contract that has an unamortized portion of a signing bonus is renegotiated to reduce the number of years on the contract, the signing bonus allocation that was originally attributed to the “lost season(s)” is reallocated proportionally to the years that remain as part of the contract.

7. What is the process for accounting for player contract incentives?

Initial Estimate

Incentives are evaluated at the beginning of the season and are determined to be either likely to be earned (LTBE) or not likely to be earned (NLTBE). Incentive

Year-end reconciliation

After a playing season has been completed, the League prepares a reconciliation comparing the amount of incentives earned based on the results of the playing season to the amounts that were included in the salary cap based on the initial estimate.

If the initial estimate is less than the incentives actually earned (paid), the difference is imputed onto the team’s salary cap. If this results in the team exceeding the cap for the year, then the amount by which the team exceeds the cap is subtracted from its cap for the following season.

Example: Assume that in 2016, the Philadelphia Eagles had LTBE totaling to $20 million, a total team salary (including LTBE) of $153 million, and a team salary cap of $155.3 million (mirroring the base NFL salary cap for 2016). If, based on their performance, the team’s players earned $25 million, that would push the Eagles’ 2016 team salary to $158 million, exceeding their salary cap by $2.7 million. This overage would cause the team to have $2.7 million subtracted from its 2017 salary cap.

Conversely, if the initial estimate turns out to be higher than the incentives actually paid during a given League Year, the difference is credited to the club’s team salary for the following League Year.

Example: Continuing with the example above, let’s say that the incentives earned by the Eagles’ players during the 2016 season was only $11 million, as opposed to the $20 million estimated and charged to the salary cap. That would mean that the team was charged $9 million too much during the playing season. If the Eagles had $3 million of unused cap room in 2016, the difference between those two numbers – $6 million – would be credited to the team’s salary cap in 2017. The $6 million is the actual amount of salary cap room that the Eagles lost in 2016 due to the misestimate of incentives. Since the Eagles had $3 million of unused cap space even using the higher initial estimate of incentives, the first $3 million of the “over-accrual” is not viewed as having impacted the Eagles’ salary cap planning and is not compensated in the following year.

While the majority of incentives are only reviewed at the conclusion of the season during the year-end reconciliation, there are scenarios in which an NLTBE incentive is recognized during the season. This happens when a player earns and is paid for an NLTBE during the season. Additionally during the final League Year, once a player has earned the incentive it will count against the cap. 

An incentive is considered LTBE if it is achieved in the previous season by the player or team. All incentives that apply to a player’s rookie season are considered LTBE. 

Any player incentive that is completely within a player’s control will be considered LTBE. Therefore, an offseason reporting bonus, offseason roster bonus (which is essentially a form of a reporting bonus), offseason workout bonuses, and bonuses for a player maintaining a particular weight are all considered LTBE in the initial estimate of incentives.

8. What are Other Amounts Treated as a Signing Bonus (OATSB)?

A signing bonus is a commitment from a team to pay a player a fixed sum for signing a contract with the team. Because this payment is given to a player for his service over the duration of a contract, it is allocated over the length of the deal (up to five years).

Beyond the classic signing bonus, there are other payments made to a player, which, for the purposes of the salary cap, are treated as a signing bonus and allocated over either five years or the length of the contract (whichever is shorter). These other amounts are also referred to by the acronym OATSB.

Option bonus: An amount paid to a player when a team activates an option to extend the player’s contract. The proration of the option bonus does not begin until the option is activated. So, while the signing bonus proration always begins in year 1 of a player contract, teams normally place the option bonus in the second or third year of the contract, which helps a team to have a lower cap hit in the year(s) preceding the option bonus. An option buyout, when it is guaranteed or paid, is also an OATSB.

Salary advance: The pre-payment of P5 salary that a player has not yet earned when paid on a guaranteed basis.

Guaranteed bonus: A bonus (reporting, workout, roster bonus) that is guaranteed by a contract or by its very nature. Examples include a player signing a contract with a reporting bonus after training camp has begun or a player signing a contract in the middle of the season that has a roster bonus. These are essentially guaranteed bonuses, since a player earns them by showing up to work on the first day of his contract.

Year-two Drop: If a player’s P5 salary has a significant drop (more than 50 percent) from year one to year two, this indicates that a signing bonus is embedded in the year-one salary. The difference in the amounts paid to a player between the two years is considered to be a signing bonus. For example, if a player’s contract calls for $10 million in year one and $4 million in year two, the $6 million difference would be treated as a signing bonus and allocated accordingly.

Completion bonus: A bonus that is owed to a player simply for fulfilling his contractual obligations without “holding out” is an OATSB. The bonus is calculated at its present value using the discount rate. If a player loses his right to the bonus and some of the bonus had previously been charged to team salary cap, an adjustment is made to the club’s team salary. If the disqualifying event occurs prior to June 1, the adjustment is made to the current year’s team salary. After that date, the credit is made to the following year’s team salary. This credit adjustment may include several years’ worth of bonus allocation.

Contract renegotiation: Any increase in a player’s salary for the current league year that results from the renegotiation of or extension to his contract after the Monday of the 10th week of the regular season is an OATSB and will be allocated accordingly.

Final League Year: In a contract (or any renegotiation or extension of a contract that is executed in the Final League Year) that is in effect for the Final League Year each of the following, if it is to be earned or paid to a player in the season following the Final League Year is treated as a signing bonus: (1) salary advance which a player is not obligated to repay, (2) any offseason workout bonus that is contingent upon the player’s participation in fewer than half of the club’s offseason workout program, (3) any offseason roster bonus, and (4) any offseason reporting bonus.

9. Is guaranteed salary also considered to be an OATSB?

Unlike guaranteed bonuses, guaranteed P5 salary is never considered an OATSB and is not recognized or charged to the cap until the playing season when the guaranteed salary is paid. However, if a player is released any guaranteed salary owed to that player accelerates to the current League Year as “dead money” on his team’s salary cap.

10. What are the salary cap rules for non-guaranteed roster bonuses?

Roster bonuses that are guaranteed are treated similarly to a signing bonus (as discussed in the section on OATSB). Non-guaranteed roster bonuses are considered a player incentive. Here we discuss non-guaranteed roster bonuses:

Offseason

Offseason roster bonuses are considered LTBE and therefore are charged to the cap in full until they are either received or a player loses the right to it. For example, if a player has a $1 million roster bonus provided he is on the roster as of the fifth day of the League Year (or even later), the full $1 million stays on the cap until the date the roster bonus is earned. If the player loses his right to the bonus because he is cut before the applicable date (e.g., the fifth day of League Year) or because his contract is renegotiated and the bonus is not part of the restructured contract, then the roster bonus is removed from team salary at that time.

In-season

Players often receive bonuses for being on a team’s 53-man (active/inactive) roster or 46-man active roster for one or more games. Unlike the off-season roster bonus, which is completely in the player’s control, the in-season bonus for being on the team roster is not solely in the player’s control. Similar to other performance incentives, LTBE is determined based on the player’s prior-season achievements.

If a player’s contract calls for a $100,000 bonus for each game that he is on the active game roster during the season, and if the player was on the active roster for at least 10 games in the previous season, then the LTBE amount is $1 million (10 games x $100,000). If the player suffers a season-ending injury during preseason, the team still carries the $1 million charge for the duration of the season, similarly to other LTBE incentives, and the facts surrounding this incentive (that it was not earned) are incorporated into the year-end reconciliation of incentives.

Conversely, if a player is on the roster beyond the assumed 10 games, the bonuses earned are immediately charged to the current year’s salary cap. In our example, if the player is on the active roster for the first 10 weeks, the team will accrue an additional $100,000 every week (starting in week 11) to account for the roster bonus the player earns for being active that week. If the player is active for all 17 weeks of the season, then an additional $700,000 ($100,000 each week for seven weeks) will be charged to the cap beyond the original $1 million to fully recognize the $1.7 million of roster bonuses earned by the player.

The immediate in-season recognition of NLTBE roster bonuses stands in contrast to other NLTBE incentives, which are only reviewed after the playing season during the year-end reconciliation.

11. What salary cap charges result from off-season workouts?

Players are compensated for off-season workouts. Beginning on the first day of the league year, each club’s team salary will be charged an amount that is calculated as follows: the minimum daily per-diem amount set forth for off-season workouts ($195 for the 2016 season, $215 for the 2017-18 seasons, and $235 for the 2019-20 seasons) is multiplied by 2,880 (80 players × 4 days/week × 9 weeks = 2,880). At the conclusion of the off-season program, the charge made based on this estimate will be removed from team salary and the actual per-diem amounts paid to the players is charged to team salary.

Workout bonus

In addition to the daily per-diem discussed above, some players will have the ability to earn a bonus for attending a specified percentage of OTAs. OTAs are a maximum of four times a week for nine weeks during the offseason (36 days). A player might earn a bonus if he attends 80 percent of the sessions (28 days). This bonus is deemed LTBE since this is completely under player control. If the player does not earn the bonus, it will be part of the year-end reconciliation.

12. How are player grievances accounted for under the salary cap?

When a player salary grievance is filed against a club, 40 percent of the amount claimed will be counted in team salary until the grievance is resolved or until the end of that League Year. When the grievance is settled, the salary cap charge related to the grievance is amended to reflect the final settlement amount (if it is settled during the same League Year that the claim was filed). If the final settlement amount is more than the original 40 percent estimate, and if the additional charge incurred to match the final settlement amount causes a team to go over the salary cap, the excess will be deducted from the club’s team salary in the following League Year. If the total grievance amount paid by a club is less than the original 40 percent estimate, and if the club finishes the season at the salary cap or below the salary cap by less than the amount of the unawarded estimate, the difference will be added to the club’s team salary for the following League Year. If the grievance is not settled until the following season, and if the final settlement amount is greater than the 40 percent amount that was previously charged to the team, the additional amount is charged to the team when paid. If the final settlement amount is less than the 40 percent estimate that was previously charged to the team, a salary credit is applied against team salary in the amount of the difference immediately upon the settlement agreement being awarded.

13. What happens if a team receives a refund from a player or insurance proceeds for previously paid salary?

If a team receives a refund from a player for any previously paid salary, the refund is credited to the club’s team salary for the following League Year. Additionally, insurance proceeds received by a team as reimbursement for previously paid salary due to a player’s inability to perform services required by his contract are considered a “refund from the player” if the club or the player purchased the policy and the amounts covered by the policy are specified in the contract.

14. Is there any scenario in which a team with limited salary cap space can execute a “sign and trade” within the salary cap rules?

If a team has exclusive negotiating rights with a player, it can sign the player to a contract even if it cannot fit the contract under team salary cap as long the player is traded on the same day. We are not aware of any situations in which this tactic was actually used by an NFL team.

15. Are there limits to when player contracts may be negotiated?

Rookie contracts for drafted players may not be amended until after the final regular season game of the contract’s third season. For undrafted players, the limitation ends with the completion of the contracts second year.

Veteran contracts do not have any limits on when the first renegotiation can occur. Any subsequent renegotiation, if it will increase the player’s compensation, has to wait 12 months from the date of the previous renegotiation.

16. What is the timeframe for players to opt of contracts?

Players must opt out of contracts before the first day of the League Year in which they wish to terminate from the contract.