I. Introduction

This Technical Information Release (TIR) explains the Massachusetts personal income tax withholding rules for eligible rollover distributions from Internal Revenue Code § 401 qualified plans and § 403(b) annuities. As of January 1, 1993, lump sum and other eligible rollover distributions from Internal Revenue Code § 401 qualified plans and § 403(b) annuities are subject to federal 20% withholding unless such distributions are paid directly to an eligible plan. I.R.C. § 3405(c), as amended by sections 521 and 522, Unemployment Compensation Amendments of 1992, P.L. 102-318, July 3, 1992. Eligible rollover distributions subject to federal 20% withholding are also subject to Massachusetts personal income tax withholding, unless such eligible rollover distributions would never be subject to Massachusetts personal income taxation independent of the facts and circumstances of a taxpayer's particular tax situation.

II. Discussion

Under the Unemployment Compensation Amendments of 1992, federal withholding provisions were amended as of January 1, 1993, to require employers to withhold 20% from eligible rollover distributions from certain pension, profit-sharing and other types of deferred compensation plans. I.R.C. § 3405(c), as amended by sections 521 and 522, Unemployment Compensation Amendments of 1992, P.L. 102-318, July 3, 1992. The 20% withholding rule does not apply to an employee who elects to have such distributions paid to another eligible retirement plan in a direct trustee-to-trustee transfer. I.R.C. § 3405(c)(2).

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 (currently 5.95%), 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.
Therefore, eligible rollover distributions subject to the federal 20% withholding under I.R.C. § 3405, are also subject to Massachusetts personal income tax withholding, unless such eligible rollover distributions are of a type that could never be subject to Massachusetts personal income taxation independent of the facts and circumstances of a taxpayer's particular tax situation. For example, distributions from the contributory retirement plans of the United States and Massachusetts governments are subject to the federal 20% withholding under I.R.C. § 3405, but are not subject to Massachusetts withholding because such distributions are never subject to Massachusetts personal income taxation whether or not such distributions are rolled over to an eligible plan. G.L. c. 62, § 2(a)(2)(E). To the contrary, eligible rollover distributions that are subject to the federal 20% withholding under I.R.C. § 3405 and that may be subject to Massachusetts personal income taxation depending on the facts and circumstances of a taxpayer's particular tax situation, are also subject to Massachusetts withholding. For example, distributions from I.R.C. § 403(b) annuity plans are subject to the federal 20% withholding under I.R.C. § 3405 and are also subject to Massachusetts withholding because such distributions may be subject to Massachusetts personal income taxation depending on whether or not all or a portion of such distributions are attributable to previously taxed voluntary contributions.

/s/ Mitchell Adams
Mitchell Adams

Commissioner of Revenue

TIR 93-3

March 9, 1993