ISSUE: Under the Massachusetts personal income tax, is a deduction permitted for contributions to a Savings Incentive Match Plan for Employees (SIMPLE plan) made on behalf of a self-employed taxpayer?

DIRECTIVE: No, Massachusetts does not allow personal income tax deductions for contributions to SIMPLE plans on behalf of self-employed taxpayers.

BACKGROUND: The purpose of this Directive is to remedy a statement in TIR 98-15, "The Effect of the Adoption of the Updated Internal Revenue Code on the Massachusetts Personal Income Tax ('Code Update')," published December 23, 1998. TIR 98-15 indicated that self-employed taxpayers could exclude contributions to their own SIMPLE accounts from personal income tax to the extent excludable under federal law. However, under federal law, self-employed individuals may deduct, not exclude, such contributions; that distinction results in different tax treatment in Massachusetts.

Massachusetts adopted, as a result of updating its reference to the Internal Revenue Code (Code), the federal rules for contributions to SIMPLE plans as they stood on January 1, 1998. Stat. 1998, c. 319. TIR 98-15 explained the impact of the code update on SIMPLE plans as follows:

Employers who do not have an employer-sponsored retirement plan and who have 100 or fewer employees may adopt a SIMPLE plan in either IRA or I.R.C. § 401(k) form. I.R.C. §§ 401(k)(11), 408(p). Eligible employees make contributions to SIMPLE accounts by electing to have the employer contribute on their behalf ("elective employer contributions") a percentage of their salary. I.R.C. §§ 401(k)(11)(B)(i)(I), 408(p)(2)(A)(i)(I). The employer must match such contributions or choose to make "nonelective" contributions on behalf of all eligible employees equaling a percentage of such employees' salaries. I.R.C. §§ 401(k)(11)(B)(i)(II), (B)(ii); 408(p)(2)(A)(iii), (B). All three types of contributions to SIMPLE accounts (elective employer contributions, employer matching contributions and nonelective contributions) are excluded from federal and Massachusetts gross income. Self-employed taxpayers are eligible for the exclusion for Massachusetts purposes to the extent they are eligible for federal purposes. (Emphasis added.)

TIR 98-15, p. 2. The underlined sentence is based on the assumption that a federal exclusion is available to the self-employed, which is not the case.

DISCUSSION: SIMPLE Plans

A recent addition to the array of tax-favored retirement plans, SIMPLE plans were added to Code §§ 401(k) and 408 in 1996. [1] SIMPLE plans enable small employers to offer retirement savings plans that need not comply with many of the complex rules imposed under ERISA and the Internal Revenue Code. A SIMPLE account may be adopted in the form of either a cash or deferred arrangement ("SIMPLE 401(k)" established under I.R.C. § 401(k)(11)) or an individual retirement arrangement ("SIMPLE IRA" established under I.R.C. § 408(p)).

Federal Treatment of SIMPLE Contributions on behalf of the Self-Employed
All contributions to SIMPLE plans, including elective contributions, are treated as employer contributions under the Code. I.R.C. §§ 401(k)(11)(B), 408(p)(2)(A). For purposes of both SIMPLE 401(k) and SIMPLE IRA plans of self-employed individuals, the definitions of employer and employee under Code § 401(c) apply. I.R.C. §§ 401(k)(11)(D); 408(p)(6)(B), (9). Section 401(c) contains the definitions and rules pertaining to self-employed individuals, including partners in a partnership and owner-employees; thus, self-employed individuals are § 401(c) employees. [2] Plan contributions to a SIMPLE plan on behalf of a self-employed individual are not excludable from federal gross income; rather, they are deductible from federal gross income in calculating adjusted gross income. I.R.C. § 404(a)(8), (m).

Massachusetts Treatment of SIMPLE Contributions on behalf of the Self-Employed
The federal deduction available for contributions to the SIMPLE plans of self-employed individuals is not available in Massachusetts. Federal deductions are available for Massachusetts income tax purposes only if specifically adopted by statute. The Massachusetts personal income tax statute adopts the federal deductions available under Code § 62 (relating to calculation of federal adjusted gross income) and § 404 (relating to employer deductions for contributions to employee plans) for purposes of calculating Part B adjusted gross income. G.L. c. 62 § 2(d)(1). However, while employers taxable under G.L. c. 62 may take Code § 404 deductions for contributions to pension or retirement plans on behalf of their employees, the statute expressly prohibits, "in the case of an individual who is an employee within the meaning of section four hundred and one (c)(1) of the Code, the deductions allowed by section four hundred and four of the Code to the extent attributable to contributions made on behalf of such individual." G.L. c. 62 § 2(d)(1)(D). Accordingly, no deduction is available in Massachusetts for contributions to SIMPLE retirement plans on behalf of self-employed individuals. TIR 98-15 is modified to the extent it is inconsistent with this position.

/s/Frederick A. Laskey
Frederick A. Laskey
Commissioner of Revenue

FAL:DMS:lab

May 28, 1999

DD 99-7



[1] Small Business Job Protection Act of 1996, Pub. L. No. 104-188, §§ 1421-2 (1996).

[2] Cf. Directive 99-4, "Deductibility of S Corporation Qualified Retirement Plan Contributions by Shareholder-Employees" (discussing why S Corporation shareholder-employees are not self-employed individuals treated as employees under I.R.C. § 401(c)(1)).