Under Internal Revenue Code Section 409A, all amounts deferred under a nonqualified deferred compensation plan are currently includible in income to the extent not subject to a substantial risk of forfeiture unless taxpayers comply with the extensive and complicated requirements of Section 409A. In addition, Section 409A increases the federal income tax rate by an additional 20%. To make matters worse, the Franchise Tax Board has interpreted California’s automatic incorporation of federal pension rules to copy this punitive federal tax increase into the California Revenue and Tax Code, which doubles the potential tax liability of Section 409A. With the Board’s interpretation, the potential taxes, interest and penalties may exceed 100% of the total payments received. The purpose of this paper is to request that the California legislature act to eliminate or, at least reduce, the 20% additional California income tax for violations of Section 409A.
Marla Aspinwall is a partner in Loeb & Loeb's Los Angeles office, where she concentrates her practice in the tax, ERISA, labor and securities aspects of executive compensation for publicly held, private and tax-exempt organizations, including employment agreements; nonqualified deferred compensation; and equity, retirement, incentive and welfare benefit plans.
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