The mid-level exception was designed to allow teams over the cap to spend a specified amount on players without affecting their luxury tax bill. In the current CBA, the mid-level exception has been modified to allow teams under the salary cap to use it.
The current mid-level exception allows teams that have no cap space to spend a maximum of $5M for four years as long as the team did not pay the luxury tax in the previous season. If the team is over the cap and did pay the luxury tax the previous season, the mid-level exception is only $3M for 3 years. If the team has cap space, they may spend $2.5M for 2 years. These amounts are set in stone for the 2012-13 season, but will go up 3% each subsequent season. Prior to the current CBA, the mid-level exception amount was pegged to the average salary of players on teams over the salary cap.