Effective for tax years beginning after December 31, 1996, the federal Small Business Job Protection Act of 1996 (1) ("SBA '96"), created a new form of retirement account called the Savings Incentive Match Plan for Employees (2) ("SIMPLE" account). The purpose of this TIR is to explain the effect of these federal provisions on Massachusetts personal income taxation, withholding, and estimated tax provisions.
A SIMPLE account may be adopted in the form of either an individual retirement arrangement ("IRA") or as a cash or deferred arrangement ("401(k)" qualified plan), by employers who do not have an employer-sponsored retirement plan and who have 100 or fewer employees. 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, which is thereby reduced. 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 categories of contributions to SIMPLE accounts, elective employer contributions and employer matching or nonelective contributions, are excluded from federal gross income. I.R.C. §§ 402(e)(3), (k)(referencing treatment under I.R.C. § 402(h)(1)&(3)). Further, such contributions are not subject to federal withholding. I.R.C. § 3401(a)(12)(A), (D). (3)
A. Personal Income Tax
Massachusetts gross income equals federal gross income with certain modifications, and, as a result, generally follows federal income exclusions. G.L. c. 62, §§ 1, 2, 3. However, Massachusetts adopts federal gross income as determined under the Internal Revenue Code ("IRC") as amended and in effect on January 1, 1988. G.L. c. 62, § 1. SIMPLE accounts and one of the provisions that exclude contributions to SIMPLE accounts from federal gross income, were enacted and became part of the IRC after January 1, 1988. (4) I.R.C. §§ 401(k)(11); 402(k); 408(p). Therefore, Massachusetts law does not adopt the federal exclusions for SIMPLE contributions, which will be included in the employee's Massachusetts gross income. (5)
General Laws Chapter 62B, § 1, defines "wages" for Massachusetts withholding purposes as that term is defined in section 3401(a) of the I.R.C. as amended and in effect for the applicable year. Therefore, changes to I.R.C. § 3401(a) are automatically adopted by Massachusetts for withholding purposes. Contributions to SIMPLE accounts are excluded from the definition of "wages" under I.R.C. § 3401(a). As a result, they are not subject to Massachusetts withholding.
C. Estimated Tax
Taxpayers are required to make estimated payments on taxable income "from sources other than wages upon which a tax is required to be withheld," unless the tax due for the taxable year is less than $200 after withholding and credits. G.L. c. 62B, § 13. Taxpayers who have not paid at least 80% of their tax liability through Massachusetts estimated payments and/or withholding are, with certain exceptions (6) liable for an addition to tax. G.L. c. 62B, § 14. Generally, this addition to tax equals the interest rate, as determined under G.L. c. 62C, § 32 (7), multiplied by the underpayment amount for the period of underpayment. Id. See Administrative Procedures 241 et. seq., Forms 1-ES and M-2210. Instead of making estimated payments, individual income taxpayers may request that their employers withhold additional amounts from their salaries to cover taxes on income which is not subject to withholding.
Since contributions to a SIMPLE account are subject to Massachusetts personal income tax, taxpayers making such contributions should review their Massachusetts withholding amounts to assess if their withholding is adequate in light of the exemption from withholding for SIMPLE contributions. If the withholding is not adequate, taxpayers must either increase their withholding by filing a new Massachusetts withholding certificate, Form M-4, with their employer or make estimated tax payments.
Commissioner of Revenue
May 23, 1997
3. Under I.R.C. § 3401(a), "wages" subject to withholding does not include "remuneration paid . . . (12) to or on behalf of, an employee or his beneficiary . . . (A) from or to a trust described in section 401(a) . . . (D) under an arrangement to which section 408(p) applies. . . ." (return to text)
4. Contributions to 401(k) qualified plans are excluded from federal gross income under I.R.C. § 402(e)(3) which was enacted prior to January 1, 1988. However, the provision creating SIMPLE accounts in 401(k) qualified plan form, I.R.C. § 401(k)(11), was enacted after January 1, 1988. Therefore, contributions to 401(k) qualified plans are excluded from Massachusetts gross income, unless they are for SIMPLE accounts. (return to text)
5. However, distributions from SIMPLE accounts are deducted from federal gross income in the determination of Massachusetts gross income until the aggregate amount deducted equals the aggregate amount previously included in Massachusetts gross income. G.L. c. 62, § 2(a)(2)(F). (return to text)