Recently, the U.S. Congress made numerous changes to the Internal Revenue Code provisions relating to qualified plans and other tax-favored retirement plans. For tax years beginning after December 31, 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increases the federal income tax contribution limits for elective deferrals, provides catch-up contributions for those age 50 or older, increases portability between tax-favored plans and accounts by expanding the rollover provisions, and makes several other changes relating to tax-favored retirement plans and accounts. See Public Law 107-16, enacted on June 7, 2001.

The purpose of this TIR is to explain the Massachusetts personal income tax treatment of certain retirement contributions and distributions, including the employer's deduction for plan contributions, following enactment of EGTRRA. Beginning with tax year 2002, there are several areas where the Massachusetts treatment will differ from the federal treatment. Due to the scope of the changes made by EGTRRA to taxation of participants of retirement plans, this TIR does not address all issues and additional guidance may be forthcoming.

I. Massachusetts References to the Internal Revenue Code in Chapter 62

Massachusetts gross income is defined as federal gross income, with certain modifications. G.L. c. 62, § 2. Federal gross income is gross income as defined under the Code. G.L. c. 62, § 1(d). When used in chapter 62, unless the context indicates otherwise, "Code" means the Internal Revenue Code of the United States, as amended on January 1, 1998 and in effect for the taxable year. G.L. c. 62, § 1(c).

Massachusetts taxpayers are required to include in Massachusetts gross income all items which are required to be included in federal gross income under the Code as amended on January 1, 1998 ("1998 Code"), unless a specific Massachusetts modification excludes such items from Massachusetts gross income. G.L. c. 62, § 2(a). All amounts which are excluded from federal gross income under the 1998 Code will be excluded from Massachusetts gross income, unless a specific Massachusetts statutory modification adds the amounts back into Massachusetts gross income. Consequently, any federal change to the definition of gross income after January 1, 1998 will not be adopted by Massachusetts unless a specific provision affirmatively adopts that change or updates with the Code as of a later date.

January 1, 1998 Internal Revenue Code. With the exception of the plans and accounts listed below that follow the current Code, Massachusetts adopts the 1998 Code in the treatment of contributions to and distributions from qualified plans and all other tax-favored retirement plans and accounts. G.L. c. 62, § 1. In addition, for purposes of chapter 62, Massachusetts adopts the 1998 Code in the treatment of the deduction at § 404 for employer contributions to a qualified plan or other tax-favored workplace retirement plan. (1)

Current Internal Revenue Code (including any post-1998 changes). Massachusetts applies the Code in effect for the taxable year for Roth IRAs as defined at IRC § 408A and education IRAs as defined at IRC § 530. G.L. c. 62, §§ 2(a)(3)(A), 5(c). The current Code applies to a § 457 plan that is a Massachusetts Government Employees' Deferred Compensation Plan. G.L. c. 29, §§ 64, 64B. In general, Massachusetts withholding provisions follow the federal withholding provisions in the current Code. G.L. c. 62B, § 1. For purposes of chapter 63, Massachusetts generally adopts the current Code, including the deduction at § 404 for employer contributions to a qualified plan or other tax-favored workplace retirement plan. (2)

II. Status of Qualified Plans and Tax-Favored Plans And Accounts

Whether a plan is a "qualified plan" is a question of federal law. (3) A qualified plan is one that is described in § 401 of the Internal Revenue Code, including § 401(k) and other profit sharing, stock bonus, money purchase pension, and defined benefit plans. A plan must achieve a qualified status by meeting the requirements of the Internal Revenue Code and appropriate regulations and rulings issued by the Commissioner of Internal Revenue. On the issue of whether a plan is a qualified plan, Massachusetts looks to the federal determination that the § 401(a) employees' trust is exempt from tax under § 501(a).

Similarly, Massachusetts respects federal designations for the following plans and accounts: individual retirement accounts (IRAs) as defined at § 408, including SEPs (simplified employee pensions) at § 408 (k) and SIMPLE IRAs (savings incentive match plans for employees) at § 408(p); Roth IRAs as defined at § 408A; qualified annuity plans as defined at § 403(a); annuity contracts as defined at § 403(b); and deferred compensation plans as defined at § 457.

III. Contribution Limits for Elective Deferrals to Defined Contribution Plans

A. Massachusetts Will Not Follow Increased Exclusions For § 403(b) Plans, § 401(k) Plans, § 408(k) Salary-Reduction SEPs and § 408(p) SIMPLE IRAs.

Prior federal exclusions based on annual inflation adjustment calculations. Under the 1998 Code, contributions made to a § 401(k) plan or a § 403(b) plan are, within certain limits, excludible from the employee's federal gross income. Under the 1998 Code, there are three independent limits on the amount excludible: (1) the § 402(g) limitation on annual elective deferrals; (2) the employee's "exclusion allowance" calculated in accordance with § 403(b)(2); and (3) the limitation on contributions under § 415. Also, under the 1998 Code, salary reduction contributions in excess of the § 402(g) limitation are includible in gross income in the year contributed. Contributions in excess of the more restrictive of the § 403(b) and § 415 limits are taxable when they become substantially vested. Under the 1998 Code, elective SEP-IRA contributions made by employees through salary reduction arrangements are excluded from federal gross income if certain conditions are met. §§ 408(k); 402(h). Under the 1998 Code, the exclusion from gross income of elective deferrals to a SIMPLE IRA is limited by § 408(p). The 1998 Code provides that the exclusion amount for any of these plans for a particular taxable year is adjusted to reflect cost of living increases.

Federal treatment. EGTRRA replaced the above scheme with a new system for elective deferrals that is not tied to inflation adjustments for years before 2007. Beginning with tax year 2002, the exclusion amounts for elective deferrals to a § 401(k) plan, a § 403(b) plan, a § 408(k) salary-reduction SEP, or a SIMPLE IRA are increased in accordance with a fixed schedule of "applicable dollar amounts." (4) Also, EGTRRA allows participants age 50 and older to make additional annual "catch-up" contributions in the case of a § 401(k) plan, a § 403(b) plan, a § 408(k) salary-reduction SEP, or a SIMPLE IRA. (5)

Massachusetts treatment. Massachusetts follows the 1998 Code for § 401(k) plans, § 403(b) plans, § 408(k) salary-reduction SEPs and SIMPLE IRAs. (6) Thus, the federal schedules for "applicable dollar amounts" and age 50 catch-up contributions are not adopted by Massachusetts for these plans. Massachusetts will continue to follow the 1998 Code method of calculating annual cost-of-living increases to the amount of the exclusion from gross income for each of these plans. See TIR 02-7 for the Massachusetts exclusion amounts for these plans for tax year 2002.

Federal - Massachusetts differences. In some cases, the elective deferrals of an individual permitted under EGTRRA for federal tax purposes will exceed the amount excludible from gross income in the current year under the 1998 Code. The elective deferrals of an individual for any taxable year are included in Massachusetts gross income to the extent the amount of such deferrals exceeds the amount excludible from gross income under the 1998 Code. See TIR 02-7.

Example: In 2002, Sarah, age 52, contributes $11,000 to her § 401(k) plan, the "applicable dollar amount" allowable for federal purposes, and, coincidentally, the amount excludible for Massachusetts purposes. See TIR 02-7 for federal and Massachusetts exclusion amounts for 2002. Also, Sarah makes an age 50 deferral of $1,000 to her § 401(k) plan. For federal purposes, the entire amount of $12,000 is excluded from gross income. For Massachusetts purposes, only $11,000 is excluded and the $1,000 attributable to her "age 50 catch-up contribution" is included in gross income. In future years, when Sarah receives distributions from the plan, $1,000 will be deductible from Massachusetts gross income.

Example: In 2002, Sam made an elective deferral of $7,000 to his SIMPLE IRA, the "applicable dollar amount" allowable for federal purposes. However, for Massachusetts purposes, the exclusion amount is $6,500. See TIR 02-7 for federal and Massachusetts exclusion amounts for 2002. For federal purposes, the entire amount of $7,000 is excluded from gross income. For Massachusetts purposes, only $6,500 is excluded, thus, $500 is included in gross income. In future years, when Sam receives distributions from the plan, $500 will be deductible from Massachusetts gross income.

B. Massachusetts Will Follow Increased Federal Exclusions For § 457 Plan For Massachusetts State and Local Government Employees; Massachusetts Will Not Follow Increased Exclusions For Other § 457 Plans

A § 457 plan is a deferred compensation plan for employees of state and local governments and tax-exempt organizations. Massachusetts state and local government employees are allowed to contribute to a deferred compensation plan created under G.L. c. 29, §§ 64-64D, and classified under the Code as an eligible deferred compensation plan within the meaning of § 457.

Prior federal exclusions based on annual inflation adjustment calculations. Under the 1998 Code, deferred compensation contributions made to a § 457 plan are, within certain limits, excludible from the employee's federal gross income. The amount of compensation that may be deferred is limited in most cases to the lesser of the dollar limit (adjusted for inflation) at § 457(b) or 33 1/3 percent of employee's compensation. Under a special catch-up rule, the § 457 plan may provide that, for one or more of the participant's last three years before normal retirement age, the otherwise applicable limit is increased to the lesser of $15,000 or the sum of the otherwise applicable limit for the year plus the amount by which the limit applicable in preceding years of participation exceeded the actual deferrals for that year.

Federal treatment. EGTRRA replaced the above scheme with a new system for elective deferrals that is not tied to inflation adjustments for years before 2007. Beginning with tax year 2002, the exclusion amounts for elective deferrals to a § 457 plan are increased in accordance with a fixed schedule of "applicable dollar amounts." (7) Also, EGTRRA allows participants age 50 and older to make additional annual "catch-up" contributions to a § 457 plan. ( 8 )

Massachusetts treatment of § 457 plans for Massachusetts state and local government employees. Since a § 457 plan for Massachusetts government employees under chapter 29 of the General Laws adopts the provisions of the Code as amended and in effect for the taxable year, Massachusetts law permits the increased elective deferrals to these plans enacted by EGTRRA including the new catch-up provisions for participants age 50 and older. Thus, in the case of elective deferrals to a § 457 plan for Massachusetts government employees, there will be no differences in the exclusion amount for federal and Massachusetts purposes. See TIR 02-7.

Massachusetts treatment of § 457 plans where the employer is not a Massachusetts government employer. The taxation of elective deferrals to a § 457 plan other than a Massachusetts government plan authorized by chapter 29 of the General Laws is governed by the 1998 Code and does not adopt the increased deferrals enacted by EGTRRA. Massachusetts will continue to follow the 1998 Code method of calculating annual cost-of-living increases to the amount of the exclusion from gross income for these plans. See TIR 02-7 for the Massachusetts exclusion amounts for these plans for tax year 2002.

Federal - Massachusetts differences. In the case of a § 457 plan other than a plan for Massachusetts government employees, in some cases, the elective deferrals of an individual permitted under EGTRRA for federal tax purposes will exceed the amount excludible from gross income under the 1998 Code. The elective deferrals of an individual for any taxable year are included in Massachusetts gross income to the extent the amount of such deferrals exceeds the amount excludible from gross income under the 1998 Code. See TIR 02-7.

IV. Massachusetts Treatment of Rollovers

A. General Rule for Distributions: Inclusion In Gross Income

The term "rollover" refers to a distribution of assets from an IRA or tax-favored retirement plan, followed by the contribution of some or all of those assets into another IRA or tax-favored retirement plan. As explained below, a rollover can be either a direct rollover or an indirect rollover. With certain exceptions, for Massachusetts purposes, the 1998 Code controls the timing of inclusion in gross income of any amount distributed to any distributee from any qualified plan or IRA (other than a Roth IRA or Education IRA). G.L. c. 62, §§ 1, 2. The rules of the 1998 Code also control the timing of inclusion in gross income of benefits paid from a § 457 plan other than a Massachusetts government employee's plan. Id. However, the rules of the Code as in effect for the taxable year control the timing of inclusion in gross income of benefits paid from a Massachusetts government employees' § 457 plan. G.L. c. 29, §§ 64, 64B.

Qualified Plan, § 403(a) Annuity Plan, or § 403(b) Annuity Contract. For Massachusetts purposes, § 402 of the 1998 Code controls the timing for inclusion in gross income of qualified trust distributions. These distributions are, except as specifically provided in § 402, included in gross income. In general, distributions from a qualified trust are includible in gross income in the year actually distributed to a distributee. See §§ 402(a), § 403(a)(1), and 403(b)(1).

§ 457 Plan (where the employer is not a Massachusetts government employer). For Massachusetts purposes, amounts deferred in § 457 plans are generally includible in gross income when the amounts are either paid or "otherwise made available" to the participant or other beneficiary under § 457 of the 1998 Code.

§ 457 Plan for Massachusetts state and local government employees. The timing for inclusion in gross income of amounts deferred in a § 457 plan created under G.L. c. 29, §§ 64 - 64D for Massachusetts government employees is determined by § 457 of the Code as in effect for the taxable year. See G.L. c. 29, §§ 64, 64B.

IRAs (other than Roth IRAs and Education IRAs). Under § 408(d) of the 1998 Code, any amount paid or distributed out of an IRA is included in gross income by the payee or distributee, as the case may be, in the year of receipt. Generally, the same tax results apply to distributions from SIMPLE IRAs as to distributions from regular IRAs. Also, under § 402(h)(3) of the 1998 Code, distributions from an IRA holding SEP contributions are included in gross income under the same rules as distributions from a regular IRA.

B. Direct Rollover Not Included in Massachusetts Gross Income; No Differences in Federal and Massachusetts Treatment

A participant in a tax-favored retirement plan may elect to have the distribution transferred directly to another tax-favored retirement plan in a direct rollover (also called a trustee-to-trustee or plan-to-plan transfer).

Exclusion from federal and Massachusetts gross income. Under federal law before EGTRRA, only certain plan distributions could be rolled over and only certain types of plans could accept rollovers. Beginning in 2002, EGTRRA significantly expands the types of rollovers that are permitted under federal law. However, any direct rollover accomplished under the new federal rules is excluded from gross income for Massachusetts purposes. For Massachusetts purposes, regardless of whether the 1998 Code or the current Code applies, a direct rollover is not included in an individual's gross income in the year of the transfer because no amount is "actually distributed" to the employee or his beneficiary.

No withholding required. There is no federal withholding required where a taxpayer elects a direct rollover, i.e., an eligible rollover distribution paid directly to an eligible retirement plan. See § 3405(c)(2). Since Massachusetts adopts § 3405 for withholding purposes, the distribution is likewise exempt from Massachusetts withholding. See Section VI, below.

Example: Mary is a participant in a § 403(b) plan. In 2002, Mary decides to take a job with a town that has a § 457 plan for Massachusetts government employees. Mary elects to have an eligible rollover distribution from her § 403(b) plan paid directly to the § 457 plan maintained by the town. Federally, the distribution is not included in gross income. For Massachusetts purposes, under the 1998 Code, the distribution is not included in gross income because no portion of the proceeds is actually distributed to her. Further, no federal or Massachusetts withholding is required on the distribution.

C. Indirect Rollovers; Differences in Massachusetts and Federal Treatment Beginning in 2002

An indirect rollover occurs in two steps. First, an individual receives an actual distribution of funds from a qualified plan or other retirement plan or account, i.e., an eligible rollover distribution. Then, after enjoying use of the funds for up to 60 days, the individual contributes some or all of the funds into an eligible retirement plan.

Withholding is required. An important difference between the two methods of rollover is that a plan distribution made to the employee as part of an indirect rollover is subject to 20% federal income tax withholding under § 3405(c). Since Massachusetts adopts § 3405 for withholding purposes, the distribution is generally subject to Massachusetts withholding. See TIR 93-3 and Section VI, below.

Exclusion from gross income; prior federal law. Under the 1998 Code, a distribution other than a direct rollover is excludible from gross income only if an individual structures the transaction in strict compliance with the rules at § 402 for indirect rollovers. Under the 1998 Code, only certain distributions are eligible for tax-free indirect rollover treatment. A list of examples is provided below. To achieve exclusion from gross income, an eligible distribution must be rolled over within 60 days to one of the retirement plans specified by the 1998 Code. Under federal law before EGTRRA, rollovers from and to § 457 plans were not allowed.

Federal treatment. EGTRRA significantly liberalized the rules for tax-free indirect rollovers. For tax years after December 31, 2001, eligible rollover distributions from qualified retirement plans, § 403(b) plans, and § 457 plans generally can be rolled over to or from any of such plans or arrangements. Similarly, distributions from an IRA generally are permitted to be rolled over into a qualified plan, § 403(b) plan or governmental § 457 plan and vice versa.

Massachusetts treatment. Since Massachusetts continues to follow the 1998 Code (except for § 457 plans of Massachusetts state and local government employees, Roth IRAs, and Education IRAs), the expanded rules for indirect rollovers are generally not adopted for Massachusetts purposes. In the case of an indirect rollover, the distribution to the individual is included in gross income for Massachusetts purposes if it was not specifically excluded from gross income under the 1998 Code.

§ 457 Plan for Massachusetts state and local government employees. An exception, however, applies to eligible rollovers from a § 457 plan for Massachusetts government employees because these plans are mandated to follow the current Code by chapter 29 of the General Laws. In the case of a distribution from a § 457 plan for Massachusetts government employees, an indirect rollover is excluded from Massachusetts gross income to the extent it is excluded from federal gross income under current federal law. However, federal withholding at the rate of 20% as well as Massachusetts withholding is required.

Federal - Massachusetts Differences. The effect of incorporating the 1998 Code for certain retirement plans is that, in some cases, an indirect rollover is excluded from gross income for federal tax purposes (under the new EGTRRA rules) but included in gross income for Massachusetts purposes. Also, there will be other instances where an indirect rollover from a plan governed by the 1998 Code is excluded from gross income for both federal and Massachusetts tax purposes. These are the transactions that are excluded from gross income under both the 1998 Code and the Code as amended by EGTRRA. Regardless of whether an indirect rollover is excluded from gross income, withholding is required.

Examples: The following list includes the most common types of indirect rollovers permitted by federal law under § 402 of the 1998 Code. These types of indirect rollovers result in an exclusion from Massachusetts gross income. However, federal withholding at the rate of 20% is required. Likewise, Massachusetts withholding is required.

Distributions from § 401(a) qualified plans. Under the 1998 Code, an "eligible distribution rollover" made within 60 days to certain "eligible retirement plans" is excluded from gross income under § 402(c). An individual can exclude from gross income in the year of receipt certain distributions from a § 401(a) qualified plan if the distribution is rolled over to another § 401(a) qualified plan or an IRA within 60 days of the date of the distribution.

Distributions from § 403(b) tax-sheltered annuities. Under the 1998 Code (similar to the rules for § 401(a) qualified plans), certain distributions from a § 403(b) plan can be rolled over within 60 days into an IRA or another § 403(b) plan.

IRA distributions; Conduit IRAs. Under the 1998 Code, certain distributions from an IRA, other than minimum required distributions, can be rolled over within 60 days into another IRA. § 408(d)(3). In general, distributions from an IRA cannot be rolled over into a qualified plan or § 403(b) plan. An exception to this rule applies in the case of so-called "conduit IRAs." Under the conduit IRA rule, amounts can be rolled from a qualified plan into an IRA and then subsequently rolled again to another qualified plan if the amounts in the IRA are attributable solely to rollovers from a qualified plan. Similarly, an amount may be rolled over from a § 403(b) plan to an IRA and subsequently rolled again into a new § 403(b) plan if the amounts in the IRA are attributable solely to rollovers from a § 403(b) plan.

Distributions from SIMPLE IRAs. Under the 1998 Code, distributions from a SIMPLE IRA can be rolled over within 60 days to another SIMPLE IRA. § 408(d)(3)(g). Also, distributions from a SIMPLE IRA can be rolled over to a regular IRA after a two-year period starting on the first day on which contributions made by the employer are deposited in the individual's SIMPLE IRA.

Distributions from SEP IRAs. Under the 1998 Code, distributions from a SEP IRA can be rolled over within 60 days to another SEP IRA or to a regular IRA.

V. Distributions; Massachusetts Deduction for Contributions Previously Subject to Tax

Taxpayers must keep records. From year to year, taxpayers must keep records of their contributions to tax-favored retirement plans in order to determine the amount of deduction allowed in subsequent years when distributions occur.

Deduction in year of distribution.
When a taxpayer receives distributions from the plan, Massachusetts allows a deduction for the portion of plan distributions that were subject to Massachusetts personal income tax in a prior year. The distributions are deducted from Massachusetts gross income to the extent that the aggregate amount deducted equals the aggregate amount previously included in Massachusetts gross income. G.L. c. 62, § 2(a)(2)(F).

Apart from the issue of application of the proper Code version (1998 Code versus current Code), there may be other instances where a distribution will not be subject to Massachusetts taxation because certain amounts were previously subject to tax by Massachusetts. For example, since Massachusetts does not allow a deduction for amounts contributed to an IRA, all amounts contributed to a lifelong Massachusetts resident's IRA have already been subject to Massachusetts personal income tax.

VI. Massachusetts Withholding On Wages

In general, Massachusetts withholding provisions follow the federal withholding provisions as amended and in effect for the current year. Massachusetts requires every employer to withhold on wages subject to Massachusetts personal income tax. G.L. c. 62B, § 2. The definition of wages for Massachusetts withholding purposes includes "wages as defined in [§ 3401(a)] of the Code [and] periodic payments and nonperiodic distributions as defined in [§ 3405] of said Code and subject to federal withholding. . . . " G.L. c. 62B, § 1.

Contributions. The federal definition of wages adopted by Massachusetts at G.L. c. 62B, § 1, excludes contributions to or on behalf of, an employee or his beneficiary-

(A) from or to a trust described in section 401(a) which is exempt from tax under section 501(a) at the time of such payment unless such payment is made to an employee of the trust as remuneration for services rendered as such employee and not as a beneficiary of the trust; or

(B) under or to an annuity plan which, at the time of such payment, is a plan described in section 403(a); or

(C) for a payment described in section 402(h)(1) and (2) if, at the time of such payment, it is reasonable to believe that the employee will be entitled to an exclusion under such section for payment; or

(D) under an arrangement to which section 408(p) applies; or

(E) under or to an eligible deferred compensation plan which, at the time of such payment, is a plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A).
§ 3401(a)(12)(2002 Code). With certain exceptions as noted in 830 CMR 62B.2.1(10)(a)(3), Massachusetts withholding is not required on any contributions to plans excluded from the federal definition of wages. However, in the case of those plans governed by the 1998 Code, even though no withholding will be required from amounts in excess of the exclusion allowed by the 1998 Code, those amounts will be included in the employee's Massachusetts gross income and will be subject to Massachusetts income tax. Where the federal exclusion amount is greater than the exclusion allowed under the 1998 Code, the employer must add back the difference in the employee's W-2 for Massachusetts tax purposes. (9) See G.L. c. 62B, § 5.

Estimated tax payments; Additional voluntary withholding. Employees contributing a greater amount to their plans than is allowed by the 1998 Code may be required to pay quarterly estimated taxes in accordance with G.L. c. 62B, §§ 13, 14. Under these provisions, every person who reasonably expects to owe more than $200 in tax on income not subject to withholding is required to pay over estimated taxes using Form 1-ES. As an alternative to paying estimated taxes on taxable income not subject to withholding, an employee can request that the employer withhold additional amounts to cover the tax liability on such income. (10)

Distributions, including rollovers. The Massachusetts rules for withholding on plan distributions, including direct and indirect rollovers, are explained in the Department's regulation at 830 CMR 62B.2.1(10)(b).

VII. Employer's Deduction of Qualified Plan Contributions

For federal tax purposes, § 404 of the Code governs deductions for employer contributions to qualified retirement plans. EGTRRA amended § 404 to allow employers to make larger deductible contributions to their employees' retirement plans in years beginning after 2001.

A. Employers Taxable On Net Income Under G.L. Chapter 63; No Differences In Federal And Massachusetts Treatment

In any case where an employer is subject to tax on its net income under chapter 63, the definition of net income refers to the provisions of the Code as amended and in effect for the taxable year. For example, where an employer is subject to the corporate excise under G.L. c. 63, §§ 32 or 39, "net income" is defined, in relevant part, as "gross income less the deductions, but not the credits, allowable under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year." See G.L. c. 63, § 30. Similarly, for the definition of net income in the case of financial institutions or utility corporations, see c. 63, §§ 1, 52A. Thus, for employers who are subject to an excise on net income under chapter 63, there will be no differences in the amount of the § 404 deduction for Massachusetts and federal purposes.

B. Taxpayers Subject To G.L. Chapter 62 Are Governed By 1998 Code: Differences In Massachusetts And Federal Treatment

The taxation of certain employers is governed by the provisions of the Massachusetts personal income tax, e.g. corporate trusts and sole proprietorships. Also, in the case of S corporations and partnerships, certain deductions flow through to the S corporation shareholders or the partners of a partnership, some of whom may be subject to tax under chapter 62.

Under G.L. c. 62, § 2(d)(1) there is a deduction for deductions allowable under § 404. Because chapter 62 incorporates the 1998 Code for the deduction at § 404, the amount of the deduction for these employers is limited to the amount allowable under the 1998 Code. (11) In addition, under G.L. c. 62, § 2(d)(1)(D), this deduction is disallowed entirely in the case of an individual who is an employee within the meaning of § 401(c)(1) (i.e., partners, sole proprietors) to the extent attributable to pension contributions made on behalf of such individual. (12)

Footnotes:

1. See Section VII, below. ( return to text)

2. See Section VII, below. ( return to text)

3. The Employee Retirement Income Security Act of 1974 (ERISA) established a number of tax qualification requirements for retirement plans by amending the Internal Revenue Code. See § 514(a) of ERISA (29 USCS § 1144(a)) whereby ERISA regulates all employee benefits plans and preempts state laws insofar as they may relate to the regulation of any employee benefit plan. ( return to text)

4. The federal applicable dollar amount for § 401(k) plans, § 403(b) plans, salary-reduction SEPs and § 457 plans is $11,000 for 2002, $12,000 for 2003, $13,000 for 2004, $14,000 for 2005, and $15,000 for 2006 (plus cost-of-living adjustment after 2006). § 402(g)(1), as amended by EGTRRA. The federal applicable dollar amount for SIMPLE IRAs is $7,000 for 2002, $8,000 for 2003, $9,000 for 2004, $10,000 for 2005, and $10,000 for 2006 (plus cost-of-living adjustment after 2006). § 408(p)(2)(E), as added by EGTRRA. ( return to text)

5. The federal age 50 catch-up amount for § 401(k) plans, § 403(b) plans, salary-reduction SEPs and § 457 plans is $1,000 for 2002, $2,000 for 2003, $3,000 for 2004, $4,000 for 2005, and $5,000 for 2006 (plus cost-of-living adjustment after 2006). IRC § 414(v)(2)(B), as added by EGTRRA. The federal age 50 catch-up amount for a SIMPLE IRA is $500 for 2002, $1,000 for 2003, $1,500 for 2004, $2,000 for 2005, and $2,500 for 2006 (plus cost-of-living adjustment after 2006). IRC § 414(v)(2)(B)(ii), as added by EGTRRA. ( return to text)

6. See DD 99-7 for the Massachusetts treatment of SIMPLE contributions on behalf of the self-employed. ( return to text)

7. The federal applicable dollar amount for § 457 plans is $11,000 for 2002, $12,000 for 2003, $13,000 for 2004, $14,000 for 2005, and $15,000 for 2006 (plus cost-of-living adjustment after 2006). § 402(g)(1), as amended by EGTRRA. ( return to text)

8. For federal purposes, the three years prior to normal retirement age, the limit in those years is computed based on twice the otherwise applicable dollar limit. § 457(b)(3)(A), as amended by EGTRRA. ( return to text)

9. The total Massachusetts wages as reported by an employer should reflect the exclusion of deferred compensation. No additional amount can be deducted on the employee's tax return. ( return to text)

10. See line 5 of Form M-4. ( return to text)

11. Whereas generally the personal income tax at G.L. c. 62, § 1(c) adopts the current Code for trade and business deductions, the 1998 Code applies to the § 404 deduction because it is not one of the trade and business deductions. IRC § 62(a)(1) defines "trade and business deductions" in relevant part to mean ". . . [t]he deductions allowed by this chapter . . . which are attributable to a trade or business carried on by the taxpayer. . . . " Emphasis supplied. However, by its terms, IRC § 404 employer contributions to a qualified plan or other tax-favored retirement plan "shall not be deductible under this chapter; but, if they would otherwise be deductible, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year." See IRC § 404(a), emphasis supplied. ( return to text)

12. See DD 01-7. Compare DD 99-4, DD 01-4. ( return to text)

/s/Alan L. LeBovidge
Alan L. LeBovidge
Commissioner of Revenue
May 10, 2002TIR 02-6