BILL ANALYSIS �
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THIRD READING
Bill No: AB 1173
Author: Bocanegra (D)
Amended: 3/21/13 in Assembly
Vote: 21
SENATE GOVERNANCE & FINANCE COMMITTEE : 7-0, 8/14/13
AYES: Wolk, Knight, Beall, DeSaulnier, Emmerson, Hernandez, Liu
SENATE APPROPRIATIONS COMMITTEE : 7-0, 8/30/13
AYES: De Le�n, Walters, Gaines, Hill, Lara, Padilla, Steinberg
ASSEMBLY FLOOR : 78-0, 5/29/13 - See last page for vote
SUBJECT : Personal income taxes: nonqualified deferred
compensation plan
SOURCE : Author
DIGEST : 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).
ANALYSIS : Existing law does not automatically conform to
changes to federal tax law, except for specific retirement
provisions contained in Subchapter D of the IRC, sometimes
called the "400 series," which guides the tax treatment of
pensions and other retirement plans. Instead, the Legislature
must affirmatively conform to federal changes outside the 400
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AB 1173
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series, unlike other states that have enacted laws that conform
its law whenever Congress changes the IRC. Conformity
legislation is introduced either as individual tax bills to
conform to specific federal changes, like the Regulated
Investment Company Modernization Act or as one omnibus bill that
provides that state law conforms to federal law as of a
specified date, currently January 1, 2009.
NQDCs are deferred compensation arrangements that don't comply
with the Employment Retirement Income Security Act of 1974, and
generally allow employers to discriminate by only offering plans
to senior management and highly-compensated employees and
unlimited employer contributions, but disallow employer
deductions for contributions until distributions are paid. In
2004, Congress added Section 409A to the IRC to limit amounts
deferred under NQDCs in response to the Enron scandal, where
executives enriched themselves at the expense of the company and
its creditors by taking substantial withdrawals from NQDCs
immediately before the firm declared bankruptcy. The new
federal law prohibits any acceleration or change in NQDC
payments, with some exceptions. Any payments that violate the
new federal law become taxable income at a penalty rate 20%
higher than the taxpayer's applicable marginal rate.
Because California law automatically conforms without
modification, the state applies the same 20% increase in the
marginal rate on NQDC distributions that run afoul of the new
federal law as a penalty, leading to a potential combined
federal and state tax that reaches almost 100% of the income.
For example, a taxpayer in the top marginal rate for federal
purposes of 39.6% pays a federal tax of 59.6% of the NQDC
distribution with the penalty rate, plus a top state tax rate of
13.3% increased to 33.3%. Additionally, because the penalty tax
can apply on distributions made in previous taxable years, but
is due and payable in the taxable year in which the Internal
Revenue Service determines a violation takes place, errors can
be very costly. As many NQDC recipients may not be aware of the
increased state tax, tax practitioners want the tax reduced to
one-fourth of the federal increase, similar to the penalty on
early Individual Retirement Account withdrawals.
This bill reduces the excise tax penalty from 20% to 5% on an
amount deferred under an NQDC plan that is not subject to a
substantial risk of forfeiture and does not meet the
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AB 1173
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requirements of IRC Section 409A.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee, the Franchise
Tax Board indicates that the bill would result in a General Fund
revenue loss of $4.7 million in 2013-14, $3.2 million in 2014-15
and $3.4 million in 2015-16. This bill increases the
department's costs (modifying tax forms, instructions and
information systems) by an unknown amount.
SUPPORT : (Verified 8/30/13)
Agricultural Council of California
BenefitRFT, Inc.
California Chamber of Commerce
California Employment Law Counsel
California Society of CPAs
California Taxpayers Association
Del Taco LLC
Dreyer, Edmonds & Robbins
Executive Compensation Solutions
Loeb & Loeb, LLP
LTC Performance Strategies, Inc.
Mahoney & Associates
Meyer-Chatfield Corp.
Mezrah Consulting
Motion Picture Association of America, Inc.
Mullin Barens Sanford Financial & Insurance Services
Munger, Tolles & Olson LLP
National Association of Insurance and Finance Advisors
National Association of Insurance and Finance Advisors of
California
National Federation of Independent Business
Paul Hastings LLP
Rex Halverson & Associates, LLC
Robin M. Schachter, Akin Gump Strauss Hauer and Feld LLP
Skadden, Arps, Slate, Meagher & Flom LLP
Spidell Publishing, Inc.
Summit Alliance Executive Benefits, LLC
Sunkist Growers Inc.
The American Council of Life Insurers
The Association for Advanced Life Underwriting
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The Association of California Life and Health Insurance
Companies
Windes & McClaughry Accountancy Corporation
ARGUMENTS IN SUPPORT : According to the author, "AB 1173
lowers the potential tax penalty rate from 20% to 5% for
nonqualified deferred compensation plans that are subject to IRC
Section 409A. A NQDC plan refers to compensation that a worker
earns in one year but that is not paid until a future year. In
general, Section 409A requires that the timing of the NQDC
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%.
The code section was created after Enron Executives accelerated
nonqualified deferred compensation payments as the company was
going bankrupt. It is meant to prevent powerful executives from
manipulating the timing of their compensation. Treasury
regulations have, however, interpreted Section 409A broadly,
possibly reaching into entertainment and general service
contracts. Specifically, 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).
Arrangements like these may be considered deferred compensation
plans, potentially covered under Section 409A.
ASSEMBLY FLOOR : 78-0, 5/29/13
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom,
Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown,
Buchanan, Ian Calderon, Campos, Chau, Ch�vez, Chesbro, Conway,
Cooley, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox,
Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon,
Gorell, Gray, Grove, Hagman, Hall, Harkey, Roger Hern�ndez,
Jones, Jones-Sawyer, Levine, Linder, Logue, Lowenthal,
Maienschein, Mansoor, Medina, Melendez, Mitchell, Morrell,
Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson,
Perea, V. Manuel P�rez, Quirk, Quirk-Silva, Rendon, Salas,
Skinner, Stone, Ting, Wagner, Waldron, Weber, Wieckowski,
Wilk, Williams, Yamada, John A. P�rez
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NO VOTE RECORDED: Holden, Vacancy
AB:ej 8/31/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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