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Governor Brown Signs California 409A Legislation

On Friday, October 4, 2013 California Governor Edmund Brown Jr. signed into law AB1173 reducing the California 409A tax penalty from 20 percent to 5 percent for taxable years beginning January 1, 2013. The bill, a victory for California businesses and employees alike, was inspired by a white paper submitted through the State Bar Sacramento Delegation last January by Loeb & Loeb LLP partner Marla Aspinwall and was brought to the state legislature by Assemblyman Raul Bocanegra (D-Los Angeles).

After winning approval in both houses, the bill finally made its way to the governor's desk and was signed last Friday. The signing comes more than five months after the start of an effort by Aspinwall and Gina Rodriguez from CalTax to gain support for the bill from various private sector organizations throughout the state. In the end, the coalition drew uniform support from several employer and employee organizations alike as well as legal, tax and benefit consultants, including the California Chamber of Commerce; California Employment Law Council; the National Federation of Independent Business; CalTax; the Motion Picture Association of America; Association for Advanced Life Underwriting (AALU); National Association of Insurance and Finance Advisors (NAIFA); Loeb & Loeb LLP; Skadden, Arps, Slate, Meagher & Flom LLP; Munger, Tolles & Olson LLP; Paul Hastings LLP; Windes & McClaughry Accountancy Corporation; Executive Compensation Solutions; Meyer-Chatfield Corp.; Sunkist Growers, Inc.; Del Taco LLC; Spindell Publishing, Inc. and many others.

"Section 409A is poorly designed legislation, made much worse by overly intrusive and incredibly complicated Treasury regulations that impose enormous tax penalties for even minor, highly technical violations," said Aspinwall. "With the signing of this bill, we have tempered the penalty in California so as to not unreasonably exacerbate the problem created by the federal legislation. Although the topic was highly technical, making it difficult to explain, the overwhelmingly positive support that we received for this bill from employer and employee organizations and their advisors as well as the Franchise Tax Board and the state legislature made clear the fairness and importance of the bill and eventually led to our success. Thanks to all of you for your support and assistance in getting this bill passed!"

In addition to reducing the excise tax penalty, the bill clarifies the scope of the California Motion Picture Tax Credit utilization and simplifies the process by which certain nonprofit organizations may obtain tax-exempt status in California.

Aspinwall testified in front of the state legislature at the State Capitol on May 6 to press for the passing of the bill.

Marla Aspinwall heads the compensation and benefits practice at Loeb & Loeb and specializes in the tax, ERISA, labor and securities aspects of executive compensation and employee benefits for publicly held, private and tax-exempt organizations, including employment agreements; qualified and nonqualified retirement and deferred compensation arrangements; and equity, incentive and welfare benefit plans.