IRC Section 409A, passed in 2004 in the wake of the Enron fallout, carries a set of draconian penalties for violating the deferred compensation rules of 409A. Most significantly is the 20% additional tax levied on the individuals entitled to the non-compliant deferred compensation. Until recently, California, which mostly just duplicates the IRC on the personal side, also incorporated the 20% meaning that the penalty applied twice–once at the federal level and once at the federal level. Thus, in addition to the ordinary income rates applicable to the compensation, California employees had to pay an additional confiscatory 40%!
Some degree of sanity seems to be creeping into the minds of California politicians. Governor Brown recently signed into law a reduction in the California 409A penalty from 20% to 5%. The change is retroactive to January 1, 2013. This is the second pro-business tax change in a short period of time. After certain favorable capital gains treatment was struck down in court earlier this year, California’s Franchise Tax Board incredibly sought to assess taxes retroactive FIVE YEARS! Happily, even California can only stomach so much kleptocracy, as the state quickly undid the reach of the FTB.