Chapter 5. Deferred Compensation of California Revenue And Taxation Code >> Division 2. >> Part 10. >> Chapter 5.

(a) Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to deferred compensation, shall apply, except as otherwise provided.
  (b) Notwithstanding the specified date contained in paragraph (1) of subdivision (a) of Section 17024.5, Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to pension, profitsharing, stock bonus plans, etc., and Part III of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to rules relating to minimum funding standards and benefit limitations, shall apply, except as otherwise provided, without regard to taxable year to the same extent as applicable for federal income tax purposes.
  (c) The maximum amount of elective deferrals (as defined in Section 402(g)(3)) for the taxable year that may be excluded from gross income under Section 402(g) of the Internal Revenue Code, as applicable for state purposes, shall not exceed the amount of elective deferrals that may be excluded from gross income under Section 402(g) of the Internal Revenue Code, as in effect on January 1, 2010, including additional elective deferrals under Section 414(v) of the Internal Revenue Code, as in effect on January 1, 2010.
  (d) (1) For taxable years beginning on or after January 1, 2002, the basis of any person in the plan, account, or annuity shall be increased by the amount of elective deferrals not excluded as a result of the application of subdivision (c).
  (2) Any basis described in paragraph (1) shall be recovered in the manner specified in Section 17085.
  (e) Notwithstanding the limitations provided in subdivision (c), any income attributable to elective deferrals in taxable years beginning on or after January 1, 2002, in conformance with Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, as applicable for federal and state purposes, shall not be includable in the gross income of the individual for whose benefit the plan or account was established until distributed pursuant to the plan or by operation of law.

The amendments made by Section 641 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) to the following provisions of the Internal Revenue Code or other federal law shall apply for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001), with respect to distributions after December 31, 2001, except as otherwise provided:
  (a) Section 72, relating to annuities and certain proceeds of endowment and life insurance contracts.
  (b) Section 219, relating to retirement savings.
  (c) Section 401, relating to qualified pension, profit-sharing, and stock bonus plans.
  (d) Section 402, relating to taxability of beneficiary of employees' trust.
  (e) Section 403, relating to taxation of employee annuities.
  (f) Section 408, relating to individual retirement accounts.
  (g) Section 415, relating to limitations on benefits and contribution under qualified plans.
  (h) Section 457, relating to deferred compensation plans of state and local governments and tax-exempt organizations.
  (i) Subsections (h)(3) and (h)(5) of Section 1122 of the Tax Reform Act of 1986.

The amendments made by Section 647 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) to the following provisions of the Internal Revenue Code shall apply for purposes of this part, Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001), with respect to trustee-to-trustee transfers after December 31, 2001, except as otherwise provided:
  (a) Section 403, relating to taxation of employee annuities.
  (b) Section 457, relating to deferred compensation plans of state and local governments and tax-exempt organizations.

(a) In addition to the application of Part II (commencing with Section 421) of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to certain stock options, paragraphs (1), (2), and (3) of Section 421(a) of the Internal Revenue Code shall also apply to any California qualified stock option that is granted to an individual whose earned income from the corporation granting the California qualified stock option for the taxable year in which that option is exercised does not exceed forty thousand dollars ($40,000). In the event that the option does not meet the necessary qualifications, the option shall be treated as a nonqualified stock option.
  (b) For purposes of this section, "California qualified stock option" means a stock option that is issued and exercised pursuant to this section and that is designated by the corporation issuing the option as a California qualified stock option at the time the option is granted.
  (c) (1) This section shall apply only to those stock options that are issued on or after January 1, 1997, and before January 1, 2002, by a corporation to its employee and are exercised by the employee, while employed by the corporation that issued those stock options (or within three months thereof, or within one year thereof if permanently and totally disabled as defined in Section 22(e)(3) of the Internal Revenue Code), during the taxable year with respect to any class of shares, or combination thereof, issued by the corporation, to the extent that the number of shares transferable by the exercise of the options does not exceed a total of 1,000 and have a combined fair market value of less than one hundred thousand dollars ($100,000). The combined fair market value of any stock shall be determined as of the time the option with respect to that stock is granted.
  (2) Paragraph (1) shall be applied by taking options into account in the order in which they were granted.
  (d) In the case of a California qualified stock option, no amount shall be included in the gross income of the employee until the time of the disposition of the option (or the stock acquired upon exercise of the option). No deduction shall be allowed under Section 162 of the Internal Revenue Code to the employer on the grant or exercise of a California qualified stock option.
  (e) Subdivision (d) shall not apply to any stock option for which an election has been made under Section 83(b) of the Internal Revenue Code, relating to election to include in gross income in year of transfer.

(a) The provisions of Section 402 of the Internal Revenue Code, relating to taxability of beneficiaries of employees' trusts, shall be modified as follows:
  (1) The amendments and transitional rules made by Public Law 99-514 shall be applicable to this part for the same transactions and the same years as they are applicable for federal purposes, except as otherwise provided.
  (2) The basis of any person in an employees' trust shall include the amount of any contributions made prior to January 1, 1987, which were not allowed as a deduction under former Sections 17503 and 17513 (including predecessor Section 17524 repealed by Chapter 488 of the Statutes of 1983) relating to special limitations for self-employed individuals.
  (b) (1) There is hereby imposed a tax on lump-sum distributions computed in accordance with the provisions of Section 402(d) of the Internal Revenue Code using the rates and brackets prescribed in subdivision (a) of Section 17041 (without regard to Section 17045) in lieu of the rates and brackets in Section 1(c) of the Internal Revenue Code. The recipient of the lump-sum distribution shall be liable for the tax imposed by this paragraph.
  (2) For purposes of this part, the provisions of Section 1122(h) of Public Law 99-514, as modified by Section 1011A(b) of Public Law 100-647, shall apply, except as modified by each of the following:
  (A) The provisions of Section 1122(h)(3)(B) of Public Law 99-514 shall be modified to refer to Section 17041 rather than Section 1 of the Internal Revenue Code of 1986.
  (B) The provisions of Section 1122(h)(3)(B)(ii) of Public Law 99-514 shall be modified to provide a tax rate of 5.5 percent rather than a tax rate of 20 percent.
  (C) The provisions of Section 1122(h)(5) of Public Law 99-514 shall be modified to refer to Section 17041 rather than Section 1 of the Internal Revenue Code of 1954.
  (3) For purposes of this section, a taxpayer shall elect the same special lump-sum distribution averaging method for purposes of this part as that elected for federal purposes under Section 402(d)(4)(B) of the Internal Revenue Code.
  (4) The provisions of Section 1124(a) of Public Law 99-514, as amended by Section 1011A(d) of Public Law 100-647, shall apply.
  (5) The provisions of Section 1124(c) of Public Law 99-514, as added by Section 1011A(d) of Public Law 100-647, shall apply.

The provisions of Section 403 of the Internal Revenue Code, relating to taxation of employee annuities, shall be modified to provide that the basis of any person in an employee annuity shall include the amount of any contributions made prior to January 1, 1987, which were not allowed as a deduction under former Sections 17503 and 17513 of the Revenue and Taxation Code (including predecessor Section 17524 repealed by Chapter 488 of the Statutes of 1983) relating to special limitations for self-employed individuals.

The provisions of Section 408 of the Internal Revenue Code, relating to individual retirement accounts, shall be modified as follows:
  (a) The following provisions shall be incorporated into Section 408(e) of the Internal Revenue Code:
  (1) In the case of a plan in existence in taxable year 1975 where contributions were made pursuant to, and in conformance with, Section 408 or 409 of the Internal Revenue Code of 1954, as amended by the Employee Retirement Income Security Act of 1974 (Public Law 93-406), any net income attributable to the 1975 contribution shall not be includable in the gross income, for taxable year 1977 or succeeding taxable years, of the individual for whose benefit the plan was established until distributed pursuant to the provisions of the plan or by operation of law.
  (2) In the case of a simplified employee pension, where contributions are also made pursuant to, and in conformance with, the provisions of Section 408(k) of the Internal Revenue Code of 1954, the net income attributable to the nondeductible portion of those contributions shall not be includable in the gross income of the individual for whose benefit the plan was established for the taxable year or for succeeding taxable years until distributed pursuant to the provisions of the plan or by operation of law.
  (3) Notwithstanding the limitations provided in former Section 17272 (as amended by Chapter 1461 of the Statutes of 1985) with respect to the amount of deductible contributions and individuals eligible for the deduction, any income attributable to contributions made to a plan in existence in taxable years beginning on or after January 1, 1982, in conformance with Sections 219, 220, 408, and 409 of the Internal Revenue Code of 1954, shall not be includable in the gross income of the individual for whose benefit the plan was established until distributed pursuant to the provisions of the plan or by operation of law.
  (b) The provisions of Section 408(d) of the Internal Revenue Code, relating to the tax treatment of distributions, are modified as follows:
  (1) For taxable years beginning on or after January 1, 1982, and before January 1, 1987, the basis of any person in the account or annuity is the amount of contributions not allowed as a deduction under former subdivision (a), (e), or (g) of Section 17272 (as amended by Chapter 1461 of the Statutes of 1985) on account of the purchase of the account or annuity.
  (2) For purposes of paragraph (1), the rules for recovery of basis shall be governed by Section 17085.
  (c) A copy of the report, which is required to be filed with the Secretary of the Treasury under Section 408(i) or 408(l) of the Internal Revenue Code, shall be filed with the Franchise Tax Board at the same time and in the same manner as specified in those sections.

The provisions of Section 408(o) of the Internal Revenue Code, relating to definitions and rules relating to nondeductible contributions to individual retirement plans, shall be applicable and the information required to be reported shall be reported on the return filed pursuant to Chapter 2 (commencing with Section 18501) of Part 10.2 at the time and in the manner as specified in that section.

For taxable years beginning on or after January 1, 2013, Section 409A of the Internal Revenue Code is modified as follows:
  (a) By substituting the phrase "five percent" in lieu of the phrase "20 percent" in Section 409A(a)(1)(B)(i)(II) of the Internal Revenue Code.
  (b) By substituting the phrase "five percent" in lieu of the phrase "20 percent" in Section 409A(b)(5)(A)(ii) of the Internal Revenue Code.

Sections 413(b)(6) and 413(c)(5) of the Internal Revenue Code, relating to liability for funding tax, do not apply.

Section 7701(j) of the Internal Revenue Code, relating to Federal Thrift Savings Funds, applies, except as otherwise provided.