October 19, 1983
You request a ruling concerning the Massachusetts income tax treatment of the deferred compensation of employees participating in the Deferred Compensation Plan ("Plan") of the City of __________ , Massachusetts ("City").
The treasurer of any Massachusetts city or town may, on behalf of the city or town, contract with an employee to defer a portion of that employee's compensation and may, for the purpose of funding an eligible deferred compensation program for the employee, invest the deferred portion of the employee's income in a life insurance or annuity contract, mutual fund, or a bank investment trust. (G.L. c. 44, § 67). An employee may defer the lesser of $7,500 or 33 1/3% of his includible compensation for a taxable year, except that he may defer more within three years of normal retirement age. (G.L. c. 44, § 67).
Deferred compensation programs for employees of Massachusetts cities and towns must be established in accordance with Internal Revenue Code Section 457. (G.L. c. 44, § 67).
In order for a deferred compensation plan to be eligible under Code Section 457, the plan must:
(1) restrict participation to those individuals who perform service for the employer;
(2) provide that the maximum that may be deferred under the plan for the taxable year not exceed the lesser of $7,500 or 33 1/3% of the participant's includible compensation (except that higher ceilings may also be provided to employees within three years of normal retirement age);
(3) provide that compensation may be deferred for any calendar month only if an agreement providing for deferral has been entered into before the beginning of that calendar month;
(4) not provide that amounts payable under the plan will be available to participants or other beneficiaries earlier than when the participant is separated from service with the employer or is faced with an unforeseeable emergency; and
(5) provide that all amounts of compensation deferred under the plan, all property and rights purchased with such amounts and all income attributable to such amounts, property or rights remain solely the property and rights of the employer until made available to the participant or other beneficiary. (I.R.C. § 457(b)).
The Deferred Compensation Plan for the City of __________ does not appear to comply with Code Section 457 or General Laws Chapter 44, Section 67 for several reasons, including:
(1) The Plan does not place a ceiling on the amount of compensation that a participant may defer for the taxable year.
(2) The Plan does not provide that all amounts of compensation deferred under it, all property and rights purchased with such amounts, and all income attributable to such amounts, property or rights will remain solely the property and rights of the employer until made available to the participant or other beneficiary.
Massachusetts gross income is federal gross income with modifications not relevant here. (G.L. c. 62, § 2(a)). Compensation deferred under an eligible deferred compensation plan is includible in an employee's federal gross income only for the taxable year in which such compensation is paid or otherwise made available to the employee or other beneficiary. (I.R.C. § 457(a)).
Compensation is subject to Massachusetts income tax withholding if it is subject to income taxation under Massachusetts General Laws Chapter 62 and if it constitutes wages as defined in Internal Revenue Code Section 3401(a) or periodic payments or nonperiodic distributions as defined in Code Section 3405 and subject to federal withholding. (G.L. c. 62B, §§ 1, 2).
Compensation deferred by employees under the Deferred Compensation Plan which is includible in their federal gross income for the taxable year is included in the employees' Massachusetts gross income and will be subject to Massachusetts income tax withholding for the taxable year.
Very truly yours,
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue