BILL ANALYSIS Ó
AB 1173
Page 1
Date of Hearing: May 24, 2013
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1173 (Bocanegra) - As Amended: March 21, 2013
Policy Committee: Revenue and
Taxation Vote: 9-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill reduces the excise tax penalty from 20% to 5% on an
amount deferred under a nonqualified deferred compensation
(NQDC) plan that is not subject to a substantial risk of
forfeiture and does not meet the requirements of Internal
Revenue Code (IRC) Section 409A (Section 409).
FISCAL EFFECT
The Franchise Tax Board (FTB) estimates revenue losses of $4.7
million in fiscal year (FY) 2013-14, $3.2 million in FY 2014-15,
and $3.4 million in FY 2015-16.
COMMENTS
1)Purpose . The author notes the relevant provisions of federal
law were created after Enron executives accelerated
nonqualified deferred compensation payments as the company was
going bankrupt. Federal law is meant to prevent powerful
executives from manipulating the timing of their compensation.
According to the author, Treasury regulations have, however,
interpreted Section 409 broadly and California's entertainment
industry has been adversely affected by Section 409A. Movie
studios often enter into agreements with actors, directors,
producers and writers whereby the talent provides services in
one year with a right under the agreement to receive
compensation in a later year, upon the occurrence of one or
more events (e.g., a film achieving a specified level of box
office receipts). The author explains arrangements like these
may be considered deferred compensation plans, potentially
covered under Section 409A and be subject to an increase of
AB 1173
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the federal income tax rate by an additional 20%.
The author contends, California's automatic incorporation of
the federal pension rules doubles the potential tax liability
in Section 409A, by imposing an additional 20% penalty under
California income tax law, resulting in potential taxes,
interest and penalties that potentially exceed 100% of the
total payments received.
2)Support . Supporters, including the California Chamber of
Commerce and a broad representation of business interests,
argue doubling the federal tax penalty on employees who have
the least knowledge and ability to influence compliance is
neither logical nor fair. No other state imposes such an
onerous penalty for Section 409A violations. While the
additional 20% federal penalty amounts to more than 50% of the
top federal tax rate, the California 20% penalty tax amounts
to 200% of the top California tax rate for residents other
than millionaires.
3)Background . AB 1173 lowers the potential tax penalty rate
from 20% to 5% for nonqualified deferred compensation plans
subject to Internal Revenue Code Section 409A (Section 409A).
In general, Section 409A requires that the timing of the
nonqualified deferred compensation payments be established in
advance of when the services are performed. If these payments
do not meet strict limitations, Section 409A increases the
federal income tax rate by an additional 20%. Adopting the
same penalty as the federal government is not in line with
state penalty practices. For example, existing federal tax
law imposes a 10% withdrawal penalty on early distributions
made from certain qualified deferred compensation plans.
California imposes a similar penalty but at the rate of 2.5%,
which is roughly 25% of the federal penalty.
4)California's Conformity . AB 1122 (Corbett), Chapter 35,
Statutes of 2002, conformed California to several provisions
of the Economic Growth and Tax Relief Reconciliation Act of
2001 relating to pension and retirement accounts.
Specifically, California has conformed to Subchapter D of
Chapter 1 of Subtitle A of the IRC, which contains IRC
Sections 401 through 420. When Congress enacted Section 409A
as part of the American Jobs Creation Act of 2004, California
automatically conformed to those provisions. In doing so,
California imposed its own 20% penalty, without legislative
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approval, on amounts deferred under a NQDC plan not meeting
specified requirements.
5)There is no registered opposition to this bill.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081