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Newly-enacted law preempting state income taxation of
retirement plan income - March 11, 1996
Attached is a copy of recently-enacted federal
legislation which prohibits a state from imposing an income
tax on "retirement income" of an individual who is neither a
resident of nor a domiciliary of such state (as determined
under the laws of such state at the time the income is
received). For purposes of this law, "retirement income"
means income from any of the following:
- Governmental retirement system plans,"Qualified"
retirement plans, and
- All other deferred compensation plans and "nonqualified"
retirement plans if such deferred compensation plan income or
such nonqualified retirement plan income is paid in
substantially equal, period payments, and such income is made
either . . .
- for the life expectancy of the recipient or the
joint lives or joint life expectancy of the recipient and the
recipient's beneficiary or
- for a period of not less than ten years.
Based upon this newly-enacted federal law, the numerator of
the fraction used to calculate the nonresident income tax
credit will include such income when such income is received
by an individual who at the time of receipt is both a
nonresident of Ohio and a nondomiciliary of Ohio.
Furthermore, based upon both this recently-enacted
legislation and Departmental policy, the following
withholding tax guidelines are now applicable with respect to
distributions from retirement plans:
- Distributions from Ohio's state retirement funds (such as
the Ohio Public Employees Retirement System): the
administrator of the retirement plan shall withhold Ohio
individual income tax from such distributions to nonresidents
of Ohio only
if the recipient so requests.
- Distributions from other governmental retirement plans or
from private sector "qualified" retirement plans: the
administrator of the plan is required to withhold Ohio
individual income tax from such distributions only if
all four of
the following apply:
- The payor is an employer, The payor maintains an
office or transacts business within Ohio, The payor is
making payment of compensation to an
employee,1and
- The employee is either domiciled in or resides in
Ohio at the time of the payment of that compensation.
Only if all
four of the above tests are met will Ohio individual
income tax withholding be required with respect to
distributions from such plans. Since most retirement
plan recipients are no longer employees of the company from
whom they receive pension benefits, in most situations Ohio
does not require withholding from such plans.
- Distributions from all other deferred compensation plans
and "nonqualified" deferred compensation plans: Ohio
individual income tax withholding is required only if
all five of
the following are present:
- The payor is an employer, The payor maintains an
office or transacts business within Ohio, The payor is
making payments of compensation to an
employee, The
employee either (i) worked in Ohio for the payor at the
time the employee earned the right to receive such income
from the payor or (ii) is residing in Ohio or is
domiciled in Ohio at the time s/he receives the payment,
and
- The payments are not substantially equal, periodic
payments or, if they are substantially equal, periodic
payments, either (i) are not made for the
life expectancy of the recipient (or the joint lives or
joint life expectancy of the recipient and the
recipient's designated beneficiary) or (ii) are made for
a period of less than ten years.
Only if all
five of the above tests are met will Ohio individual
income tax withholding be required with respect to such
"nonqualified" deferred compensation
plans._______________________________________Notes:
- Except for individuals participating in "nonqualified"
deferred compensation programs, in most situations most
individuals receiving retirement plan payment are no longer
employees of the organization. Thus, in most cases payments
of retirement benefit from government-sponsored retirement
system plans and from "qualified" retirement plans will
not be
subject to Ohio income tax withholding.
A plan is generally a "nonqualified"
plan if the plan discriminates in favor of
highly-compensated executives. Such plans can include
deferred bonus programs which allow the recipient to
receive her/his bonus over several years. In most cases the
payor will be the employer (rather than a separate pension
plan trust), and the payment will be subject to federal
income tax withholding and will be reported on IRS form
W-2. In those situations where such payments are reported
on the IRS form W-2, such payments to nonresidents and
nondomiciliaries will be subject to Ohio individual income
tax withholding only if the five above-listed requirements
are present.
Because deferred bonuses are a form of a
nonqualified deferred compensation program, we require
income tax withholding with respect to payment of such
deferred bonuses to nonresidents and nondomiciliaries if
all five of the above-listed requirements are present.
- Now that the U. S. Congress has specifically addressed
retirement income attributable to retirement plans, the
Department of Taxation's position is that nonresidents and
nondomiciliaries who exercise stock options received on
account of employment in Ohio must pay Ohio individual income
tax on the Ohio-related appreciation. For purposes of
determining the Ohio-related appreciation, the nonresident
will treat as Ohio income the value of the unexercised stock
option at the time the individual left Ohio minus the value
of the unexercised stock option at the time the individual
received the option. In those cases where an individual
receives a stock option prior to either moving to or working
in Ohio, then the Ohio-related appreciation will be based
upon the value of the unexercised stock option when the
individual leaves Ohio minus the value of the unexercised
stock option at the time the individual first became a
resident of Ohio or first began working in Ohio.
_______________________________________1 . In accordance with
the first paragraph of ORC section 5747.01, we treat an
individual as an "employee" for Ohio withholding tax purposes
only if the Internal Revenue Service treats the individual as
an employee for federal withholding tax purposes.
* * * * *
Tax Information Releases are not "Opinions of the Tax
Commissioner" within the meaning of ORC section 5703.53.
However, the above discussion does reflect the Income Tax
Audit Division's interpretation of the law.
For more information about this new law, call the numbers
listed below:
1-614-466-5285
Ohio Relay Service for the hearing-impaired: 1-800-750-0750