You have requested rulings on behalf of *************** and its affiliates (collectively, the "Company"). The Company needs to determine if income tax withholding is required pursuant to G.L. c. 62B, § 2, on payments to individuals who participate in a nonqualified deferred compensation or "excess benefit" plan.
*************** a Delaware corporation, is the common parent of an affiliated group of corporations filing a consolidated federal income tax return. Its subsidiary, *************** is the principal reporting corporation for the affiliates doing business in Massachusetts and filing a Massachusetts combined corporate excise tax return. Certain affiliates and have no offices or operations in the Commonwealth of Massachusetts.
Effective January 1, 1984, the Company adopted a nonqualified, deferred compensation plan ("Nonqualified Plan") for certain employees. The purpose of the Nonqualified Plan is to supplement a qualified deferred compensation plan, which was adopted as of August 1, 1971 and merged into another qualified plan effective January 1, 1992 ("Qualified Plan"). The Internal Revenue Service, by a determination letter dated January 30, 1995, ruled that the Qualified Plan provides retirement income that is income from a qualified plan described in § 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and which is exempt under § 501(a) of the Code.
The Nonqualified Plan supplements the Qualified Plan and incorporates certain definitions and provisions of the Qualified Plan. The Nonqualified Plan provides deferred compensation that is retirement income in excess of the limits imposed by §§ 401(a)(17) and 415 of the Code. The Plans provide for lump sum distributions under certain circumstances. Generally, lump sum distributions are made under the Nonqualified Plan only to former employees whose employment has been terminated for no less than 30 days.
Prior to a distribution, the Company determines the residence of its employees in accordance with the definitions provided in G.L. c. 62, § 1. In making its determination, the Company relies on affidavits made under the pains and penalties of perjury prepared by former employees regarding residency unless it has actual knowledge that an affidavit is false.
1. Is the Company required to withhold Massachusetts state income tax on payments to non‑residents under the Nonqualified Plan?
2. Is the Company required to withhold Massachusetts state income tax on payments to Massachusetts residents under the Nonqualified Plan?
3. If a Company affiliate lacks nexus with the Commonwealth of Massachusetts, is the affiliate required to withhold Massachusetts state income tax on payments to residents made under the Nonqualified Plan?
4. Is the Company entitled to rely on affidavits from employees regarding their state of residence?
1. The Company Is Not Required to Withhold Massachusetts State Income Tax on Payments to Non-Residents under the Nonqualified Plan.
In 1995 Congress enacted the Pension Source Act which amended Title 4 of the United States Code to include new Section 114 to prohibit state taxation of certain retirement income of non‑residents. See P.L. 104‑95, 4 USC § 114 (effective for payments received after December 31, 1995). This section provides that no state may impose income tax on any retirement income of an individual who is not a resident or domiciliary of such state. See 4 USC § 114(a). Technical Information Release ("TIR") 97‑2 explains the Massachusetts income tax treatment of retirement income for nonresidents and nondomiciliaries following enactment of the Pension Source Act.
Income from the Nonqualified Plan is exempt from Massachusetts taxation and withholding requirements pursuant to 4 U.S. C. § 114(b)(1)(I)(ii) as long as the plan remains a plan as described in IRC § 3121(v)(2)(C), the income is paid after termination of employment, and the former employee is a non-resident of Massachusetts. Additionally, the plan must be maintained solely for the purpose of providing benefits for employees in excess of the limitations imposed by one or more of IRC §§ 401(a), 401(k), 401(m), 402(g), 403(b), 408(k) or 415, or any other limitation on contributions or benefits that may apply in the Code. See TIR 97-2 and 4 USC § 114.
2. The Company Is Required to Withhold Massachusetts State Income Tax on Payments to Massachusetts Residents under the Nonqualified Plan.
Technical Information Release 97-2 and 4 USC § 114 apply only to distributions made by certain pensions and deferred compensation plans to individuals who are not residents or domiciliaries of Massachusetts. Distributions made under the Nonqualified Plan to Massachusetts residents or domiciliaries are subject to taxation and withholding under G.L. c. 62, §§ 1, 2 and c. 62B, § 2.
Massachusetts General Laws chapter 62, section 2 defines Massachusetts gross income as federal gross income with certain modifications. In general, Massachusetts withholding provisions follow the federal withholding provisions. Massachusetts requires every employer to withhold on wages subject to Massachusetts personal income tax. G.L. c. 62B, § 2. The employer is required to withhold a tax substantially equivalent to the tax imposed under chapter 62, in accordance with tables prepared by the Commissioner. The definition of wages for Massachusetts withholding purposes includes "wages as defined in [§ 3401(a)] of the Internal Revenue Code [and] periodic payments and nonperiodic distributions as defined in [§ 3405] of said Code and subject to federal withholding . . . ." G.L. c. 62B, § 1. See Technical Information Release 93-3. The payments made under the Nonqualified Plan are nonperiodic distributions under § 3405(b) of the Code and the Company is required to withhold Massachusetts income tax on the payments made to Massachusetts residents.
3. Affiliates Lacking Nexus with the Commonwealth of Massachusetts are not Required to Withhold Massachusetts State Income Tax on Payments Under the Nonqualified Plan.
An employee's residency or domicile alone does not give rise to a withholding tax obligation on the part of an employer that has no nexus with Massachusetts. See generally, Travis v. Yale, 252 US 60 (1920). If no nexus is established, Massachusetts cannot require withholding, but does request that withholding be instituted, especially if applied for by the former employee.
4 . The Company Is Entitled to Rely on Affidavits from Former employees regarding their state of residence Unless It Has Knowledge that the Information Provided Is False.
The Commissioner requires that employers have former employees complete Form M-4P, Massachusetts Withholding Exemption Certificate for Pension, Annuity and Other Periodic and Nonperiodic Payments in determining if Massachusetts withholding is required for pension or other like payments. The Form, on Line 5, Box D, has a checkbox for individuals exempt from Massachusetts taxation due to legal residence. The Company may rely on this form, as provided by its employees, to determine state of residence. If an employee states he is not a resident of Massachusetts, the Company is not required to withhold Massachusetts income tax on payments to the employee under the Nonqualified Plan so long as the Company has no knowledge that the information provided on the form is false. G. L. cc. 62B, § 7(e) and 62C, § 73(f), (g).
Under the facts stated above, it is ruled that:
1. The Company is not required to withhold Massachusetts income tax on payments made under the Nonqualified Plan to former employees who are either non‑residents or nondomiciliaries of Massachusetts.
2. The Company is required to withhold Massachusetts income tax on payments made under the Nonqualified Plan to Massachusetts residents.
3. An affiliate of the Company that lacks nexus with the Commonwealth of Massachusetts is not required to withhold Massachusetts state income tax on payments made under the Nonqualified Plan to residents or nonresidents of Massachusetts.
4. The Company is entitled to rely on Form M-4P statements from former employees regarding their state of residence provided that it has no knowledge a statement is false.
Very truly yours,
/s/Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.
Senior Deputy Commissioner of Revenue
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