November 12, 2013
CA Reduces 409A Penalty Tax
Good news for CA taxpayers involved in violations of Section 409A: the state has reduced its penalty tax for these violations from 20% to 5%.
CA’s penalty is in addition to the federal penalties of a 20% tax plus interest at 1% higher than the penalty rate. With the combined federal and CA state penalties, an individual that is subject to the maximum federal and CA state marginal income tax rates of 39.6% and 10.3% respectively, could have incurred a cumulative tax liability as a result of a 409A violation that was close to, or possibly even more than, 100% (don’t forget that FICA would also apply to the income). So now CA taxpayers that end up subject to the 409A penalties are only paying an additional combined federal and state penalty tax of 25% (on top of the standard tax rates that apply to the income) instead of a combined 40% penalty (of course, at the maximum individual tax rates, that’s still potential a tax liability of around 80%).
The new CA penalty tax is effective retroactively to Jan 1 of this year. Here are a couple of alerts on the change: Skadden, Pillsbury, Cooley.
Blog Survey: 409A Compliance Failures
Thinking about how draconian the taxes could be for a 409A compliance failure got me wondering whether anyone (other than that poor guy in Sutardja v. United States, see “409A in the Courts“) is actually paying these penalties . So I put together a quick survey.