BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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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 León, 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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          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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          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, Chávez, 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 Hernández,  
            Jones, Jones-Sawyer, Levine, Linder, Logue, Lowenthal,  
            Maienschein, Mansoor, Medina, Melendez, Mitchell, Morrell,  
            Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson,  
            Perea, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas,  
            Skinner, Stone, Ting, Wagner, Waldron, Weber, Wieckowski,  
            Wilk, Williams, Yamada, John A. Pérez

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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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