California reduces additional tax on section 409A non-compliance

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By Mark Jones, Cindy Schlaefer, Michael Cataldo and Marta Porwit

On 4 October 2013, governor Jerry Brown signed into law Assembly Bill (AB) 1173, which reduces from 20 per cent to five per cent the additional California tax on non-qualified deferred compensation that fails to comply with section 409A of the Internal Revenue Code. This rate reduction is effective on 1 January 2013.

Section 409A applies to non-qualified deferred compensation that an employee or other service provider earns or has a legally binding right to receive in one tax year, but that is not payable until a later tax year. In order to avoid unfavourable tax treatment, such compensation arrangements must meet certain requirements, including advance elections as to the form and time of distribution, restrictions on distribution events and a six-month delay of severance payments to key employees of public companies.

If these requirements are not met, the deferred compensation will become subject to ordinary federal income tax as of the date on which the payment is no longer subject to a substantial risk of forfeiture… 

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