This Technical Information Release (TIR) explains the Massachusetts income tax treatment of certain pension or retirement income following enactment of Public Law 104-95 (P.L. 104-95). This law prevents any state from taxing income from certain pensions and deferred compensation plans paid to individuals who are not residents or domiciliaries of that state. Massachusetts already exempts much of the pension income paid to non-residents covered by P.L. 104-95, but will, in accordance with it, now exempt from taxation some previously taxable pension income.

Discussion

Public Law 104-95 amends Title 4 of the United States Code to include new Section 114. This section prevents a state from taxing pension income received after December 31, 1995 by persons who are neither residents nor domiciliaries of that state if the income is received from:

(1) a qualified trust under IRC § 401(a) exempt from taxation under IRC § 501(a);
(2) simplified IRC § 408(k) plans;
(3) IRC § 403(a) annuity plans;
(4) IRC § 403(b) annuity contracts;
(5) IRC § 7701(a)(37) individual retirement plans;
(6) eligible deferred compensation plans of state and local governments and tax exempt organizations as defined by § IRC 457;
(7) IRC § 414(d) government plans;
(8) a trust or trusts described in IRC § 501(c)(18); and
(9) any plan, program or arrangement described in IRC § 3121(v)(2)(C) if payments are made at least annually and spread over the actuarial life expectancy of the beneficiaries, or if payments are spread over at least a ten year period. Such income is also protected from state taxation if the plans are trusts under IRC § 401(a), but exceed limits laid down in IRC §§ 401(k), 401(m), 402(g), 403(b), 408(k) or 415 or any other limitation on contributions or benefits which may apply in the Code.

P.L. 94-105 also prevents taxation of any retirement or retainer pay of a non-resident or a non-domiciliary member or former member of a uniformed service computed under Chapter 71 of Title 10 of the United States Code (military pensions).

Much of the income from pensions listed above was already exempt from Massachusetts taxation when the income was received by a non-resident. See 830 CMR 62.5A.1(5), exempting, in general, non-resident pension income from qualified plans. The principal new exemptions affecting Massachusetts taxation relate to income from:

(1) non-contributory government plans;
(2) eligible deferred compensation (IRC § 457) plans;
(3) IRC § 501(c)(18) plans;
(4) non-qualified plans under IRC § 3121; and
(5) military pensions of non-residents.

This TIR applies to amounts received after December 31, 1995. Nothing in this TIR affects the taxation of pension income received by residents or domiciliaries of Massachusetts.

Mitchell Adams
Commissioner of Revenue


TIR 97-2


January 31, 1997