California "stay or pay" rule and taxation of delayed signing bonuses

The California "stay or pay" rule effective January 1, 2026 will in general prohibit clawbacks when an employee leaves employment.  However, under limited circumstances, the rule does not apply to a signing bonus.  Among the conditions for it not applying is that the employee must have the option to delay the signing bonus until the end of the retention period.

Has anyone thought about the taxation of the signing bonus if it is deferred?  Presumably, if it is considered "made available," it would be taxed immediately upon hire, even if the employee elected to defer it until the end of the retention period.  And a signing bonus that is actually paid is taxed upon payment, even if it has to be returned if the employee doesn't stay until the end of the retention period, so presumably the same rule would apply to a bonus that is made available.

In the 409A context, presumably in order to avoid this issue, a deferral is recognized only if it is made within the first 30 days, and only if it relates to compensation earned after the election.  But a signing bonus is earned upon signing, so that wouldn't work here.

Any thoughts?

Might a signing bonus not be available until a not-yet employee has signed and become bound by the “separate agreement” California Business and Professions Code § 16608(b)(2)(D)(i) requires to set up a § 16608(b)(2)(D) exception to § 16608(b)(1)?

Recognizing that “[t]he worker has an option to defer receipt of the payment to the end of a fully served retention period” [§ 16608(b)(2)(D)(iv)], could the agreement include the not-yet employee’s exercise (or nonexercise) of that option and election, irrevocable, specifying the date or dates of the employer’s payment obligation?

If these are so, might the obligee have no legally enforceable right to a signing-bonus payment until its agreed payment date? Might the employer’s obligation be set by the separate agreement?

You’ve spotted a real issue that calls for attention to § 409A.

22 hours ago, Peter Gulia said:

You’ve spotted a real issue that calls for attention to § 409A.

Yeah, at least in the 457 context, the rule is that an employee cannot delay the vesting of a voluntary deferral unless the new vesting date is at least 2 years after they original vesting date and the employee gets at least a 25% premium for delaying the vesting.  The theory seems to be that no one would voluntarily defer an amount that they could get right away unless they got something extra for it. And if the delay in vesting were not recognized here, then the short-term deferral rule would not apply and we would need to ensure that the agreement met the 409A conditions.

I'm not sure that the assumption that no one would delay vesting really applies here, in the sense that if the person got the money right away, it would be subject to the clawback.  But it would seem prudent to comply with 409A.

However, I'm not sure how one would comply with 409A.  A particular issue in this regard is that Treas. Reg. § 1.409A-2 in general requires a deferral election to be made by December 31 of the year before the compensation is to be earned.  There is an exception upon initial participation, but it requires that the election be made in the first 30 days of employment and apply only to compensation earned after that date--which would seem not to work in this case, since the compensation would be earned on the first day.  There is another exception for an initial deferral election with respect to certain forfeitable rights, but it would apply only if the IRS were to recognize the delay in vesting (i.e., that the rights were forfeitable).