403(b) TSA and TIAA-CREF - Retirement Plan

Generally, 403(b) retirement plans cover employees of universities, tax-exempt or non-profit organizations and local governments. Two types of 403(b) plans are:

  • Tax-Sheltered Annuity Plan (TSA);
  • Teacher's Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF).

Two types of contributions:

  • Voluntary contributions are payments made to a plan in which an employee agrees to a reduction in salary, and the employer agrees to turn over this amount and an additional amount equal to a percentage of the employee's salary. Both amounts paid are considered employer contributions if they are made pursuant to a salary reduction agreement and are not required under a retirement program of the employer;
  • Mandatory contributions are payments made to a retirement benefit plan that are required to be made by an employee usually during a trial work period.
Note: Effective January 1, 1998, Massachusetts adopts the federal treatment for Voluntary Contributions to a 403(b) Annuity, under the Internal Revenue Code, as amended and in effect on January 1, 1998 and automatically adopts any future changes to the federal provisions for Voluntary Contributions to a 403(b) Annuity. For tax years beginning on or after January 1, 1998, voluntary employee contributions are no longer added back. Both voluntary and mandatory are excluded from gross income

Massachusetts follows the federal treatment for the following:

  • Contributions made by both the employer and employee to a 403(b) plan are excluded from the employee's gross income in the year contributed whether they are mandatory or voluntary contributions;

    2013 exclusion amounts for elective deferrals, including "catch-up" contributions - see table
  • Income earned on the contributions while in the 403(b) plan is excluded from gross income;
  • Distributions made to the retiree from the 403(b) plan are excluded from gross income to the extent that such distributions represent Massachusetts previously taxed contributions. Distributions in excess of Massachusetts previously taxed voluntary contributions prior to January 1, 1998 are taxable. 
Special "Catch-Up" Provision:
A limited "catch-up" provision allows employees in the last three years before reaching normal retirement age to defer larger amounts, provided that the full amount has not been used in prior years.

Advice for Massachusetts Taxpayers:
Mandatory contributions by an employee before January 1, 1998 to a 403(b) plan were excluded from the employee's gross income in the year contributed. Voluntary contributions were included in the employee's gross income.

Taxpayers with 403(b) retirement plans prior to 1998 should keep records of all voluntary contributions made up to 1998 that were included in Massachusetts gross income.

FICA amounts related to excludable 403(b) contributions may not be deducted since the FICA relates to income not taxed in Massachusetts. This is similar to the Massachusetts treatment of Social Security Benefits - the benefits are excludable and no FICA deduction is allowed.


Federal Employee Contributory Pension

Federal employee pensions are contributory annuity, pension, endowment, or retirement funds of the United States government.

Federal Employee Contributory Pensions Include U.S. Postal Service Pensions:

Title 39 of the U.S. Code states that the U.S. Postal Service is an independent organization of the Executive Branch of the U.S. Government. S. 1005 of Title 39 entitled "Applicability of laws relating to Federal employees" states at subsection (d)(1) that the Postal Service shall withhold from employees' pay and pay into the Civil Service Retirement and Disability Fund specified amounts and make specified contributions itself on behalf of employees. Thus, a pension from the Post Office is "income from a contributory retirement fund of the U.S. Government" and therefore exempt under c. 62, s. 2(a)(2)(E).

Massachusetts treatment for the following:

  • Contributions made by an employee to a federal employee contributory plan are included in both federal and Massachusetts gross income;
  • Income earned on the contributions while in a federal employee contributory plan is excluded from gross income;
  • Distributions made to the retiree from a federal employee contributory plan are excluded from Massachusetts gross income. Federally, amount of distribution representing previously taxed contributions are excluded. Amount of distribution over and above previously taxed contributions is included in Federal gross income.

Special "Catch-Up" Provision:
A limited "catch-up" provision allows employees in the last three years before reaching normal retirement age to defer larger amounts, provided that the full amount has not been used in prior years

Surviving Spouse:
Government contributory pensions, described above, which are paid to a surviving spouse, are also tax exempt.

Retirement Deduction:
Contributions made by an employee are excluded from federal gross income; for Massachusetts, such amounts are added back to compute Massachusetts gross income so that a taxpayer may claim the deduction under c. 62, s. 3B(a)(4) for contributions made to a Massachusetts annuity, pension, endowment or retirement fund. The maximum deduction allowed is $2,000 per taxpayer. The payments added back are reflected in Massachusetts wages as shown in Box 16 of the W-2 statement. This amount will be more than the amount shown as Federal wages in Box 1 of the W-2.

Senior U.S. Judges' pension distributions are subject to Massachusetts income tax and withholding requirements since such pensions are not contributory.


Federal Employee Thrift Savings Plan (TSP)

The Thrift Savings Plan (TSP) provides federal employees with the same savings and tax benefits that many private employers offer their employees. This plan is similar to private sector 401(k) plans. Taxpayers can defer tax on part of their wages by having it contributed to their accounts in the plan.

Massachusetts follows the federal treatment for the following:

  • Contributions made by an employer to a thrift savings plan are excluded from the employee's gross income in the year contributed;

2013 exclusion amounts for elective deferrals, including "catch-up" contributions - see table

  • Income earned on the contributions while in the thrift savings plan account is excluded from gross income;
  • Distributions made to the retiree from the plan are fully taxable in the year paid.

Special "Catch-Up" Provision:
A limited "catch-up" provision allows employees in the last three years before reaching normal retirement age to defer larger amounts, provided that the full amount has not been used in prior years.


Massachusetts Government Employees 457 Deferred Compensation Plan

457 plans are deferred compensation plans set up for public employees. These plans are maintained by state and local governments and other tax exempt organizations as defined under I.R.C. §457. Eligible deferred compensation plans are created under Massachusetts General Laws, Chapter 29, Sections 64-64D and classified under the Internal Revenue Code as an eligible deferred compensation within the meaning of I.R.C. §457. An example of a §457 plan is the Aetna Plan.

For tax years beginning on or after January 1, 2002, Massachusetts adopts the federal provisions relating to qualified plans and other tax-favored retirement plans; these provisions increase the federal income tax contribution limits for elective deferrals, provide catch-up contributions for those age 50 or older, and increase portability between plans and accounts by expanding the rollover provisions.

Massachusetts retains the reference in Chapter 62 to the 2005 Code for most income tax provisions, but adopts the current Code for the following sections of the Code as amended and in effect for the taxable year ("current Code"): I.R.C. §§72, 401 to 420 inclusive (but excluding §§402A and 408q), 457, 3401 and 3405.

Massachusetts follows the federal treatment for the following:

  • Contributions made by the employee to a 457 plan are limited for any tax year to the lesser of a specific dollar limit or 33 1/3% of the participant's compensation and the amount is excluded from the employee's gross income in the year contributed;

    2013 exclusion amounts for elective deferrals, including "catch-up" contributions - see table

    Note: If the employee participates in more than one unfunded deferred compensation plan of a governmental or tax exempt employer, the aggregate deferral cannot exceed the maximum exclusion amounts per table above;
  • Income earned on the contributions while in the 457 plan account is excluded from gross income;
  • Distributions made to the retiree from the 457 plan are included in gross income in the year paid.

Special "Catch-Up" Provision:
A limited "catch-up" provision allows employees in the last three years before reaching normal retirement age to defer larger amounts, provided that the full amount has not been used in prior years. 


Massachusetts Police or Fire Department Pension

Massachusetts police or fire department pensions are contributory annuity, pension, endowment, or retirement funds of the Commonwealth of Massachusetts (or any of its political subdivisions).

Massachusetts Treatment for the following:

  • Contributions made by an employee to a police or fire department contributory plan are included in gross income even though they are excluded from federal gross income;
  • Income earned on the contributions while in a police or fire department contributory plan is excluded from gross income;
  • Distributions made to the retiree from a police or fire department contributory plan are excluded from Massachusetts gross income even though they are included in federal gross income.

Retirement Deduction:
Contributions made by an employee are excluded from federal gross income; for Massachusetts, such amounts are added back to compute Massachusetts gross income so that a taxpayer may claim the deduction under c. 62, s. 3B(a)(4) for contributions made to a Massachusetts annuity, pension, endowment or retirement fund. The maximum deduction allowed is $2,000 per taxpayer. The payments added back are reflected in Massachusetts wages as shown in Box 16 of the W-2 statement. This amount will be more than the amount shown as Federal wages in Box 1 of the W-2.

In addition, the employee receives special treatment under Massachusetts law for the following:

  • Annuities to dependents of policemen or firemen and certain other public employees killed in the performance of duty are considered to be paid in lieu of workmen's compensation and, therefore, are not taxable. A city or town may grant an annuity to a surviving spouse not entitled to a retirement allowance and this would also be not taxable;
  • Survivor annuity benefits paid on account of the death of a public safety officer killed in the line of duty are excluded in full from federal and Massachusetts gross income.

Massachusetts State and Local Employee Contributory Pension

Massachusetts state/local employee pensions are contributory annuity, pension, endowment, or retirement funds of the Commonwealth of Massachusetts (or any of its political subdivisions) including the MA Optional Retirement Program (ORP), a defined contribution retirement plan for certain employees of the Commonwealth's institutions of public higher education established by G.L. c. 15A, section 40.

Massachusetts treatment for the following:

  • Contributions made by an employee to a Massachusetts State and Local Employee contributory plan are included in Massachusetts gross income even though they are excluded from federal gross income;
  • Income earned on the contributions while in the Massachusetts State and Local Employee contributory plan is excluded from gross income;
  • Distributions made to the retiree from a Massachusetts State and Local Employee contributory plan are excluded from Massachusetts gross income even though they are included in federal gross income.

Surviving Spouse:
Massachusetts state/local employee contributory pensions that are paid to a surviving spouse are also tax exempt.

Retirement Deduction:
Contributions made by an employee are excluded from federal gross income; for Massachusetts, such amounts are added back to compute Massachusetts gross income so that a taxpayer may claim the deduction under c. 62, s. 3B(a)(4) for contributions made to a Massachusetts annuity, pension, endowment or retirement fund. The maximum deduction allowed is $2,000 per taxpayer. The payments added back are reflected in Massachusetts wages as shown in Box 16 of the W-2 statement. This amount will be more than the amount shown as Federal wages in Box 1 of the W-2.

Pre-Retirement Distributions:
A pre-retirement distribution occurs when a taxpayer receives distributions prior to retirement age, due to either termination of state service or death. These distributions are taxed as follows:

  • The portion of a pre-retirement distribution that reflects the return to the taxpayer of previous contributions to the state retirement system is excluded from federal gross income. Since there is no specific Massachusetts provision to add back this amount, it is also excluded from Massachusetts gross income.
  • The portion of the pre-retirement distribution that reflects interest earned on amount contributed is included in federal gross income. However, since there is a Massachusetts provision that specifically eliminates income from any contributory annuity, pension, endowment or retirement fund of....the Commonwealth or any political subdivision therefore, to which the employee has contributed, this amount is excluded from Massachusetts gross income.

MBTA Pension

The MBTA pays into the retirement fund for its employees a certain percentage of their salaries. These contributions are considered "picked up" which means they are designated as "employee contributions" even though they are not actually paid into the fund by the employees.

Massachusetts treatment for the following:

  • Designated "employee contributions" made by an employer to a MBTA plan are excluded from the employee's gross income in the year contributed since they are considered employer contributions. Withholding is not required on the contributions;
  • Income earned on the contributions while in the MBTA plan is excluded from gross income;
  • Distributions made to the retiree from a MBTA plan are excluded from Massachusetts gross income since they are considered distributions from an employee contributory pension. These distributions, however, are included in federal gross income.

Social Security (FICA) and Medicare Deduction and Retirement Deduction:
Since the contributions are excluded from gross income, no retirement deduction is allowed for contributions to a Massachusetts state, city, town, county and other political subdivision annuity, pension endowment or retirement fund.

However, since MBTA employees also pay into the Social Security system, they may deduct the FICA contributions, up to maximum of $2,000, on their Massachusetts return.


Out-of-State Employee Contributory Government Pension

Individuals who move into Massachusetts and receive pension distributions from their former states' public employee retirement plans may deduct such amounts from Massachusetts gross income if the former state does not tax income received by its residents from Massachusetts contributory public employee retirement plans.

The income received must first be included in the employee's Massachusetts gross income as pension income on Form 1, Line 4. If the amount is deductible from Massachusetts gross income, it is then claimed as a deduction on Schedule Y, Line 13.

Pariser Decision:
Prior to the Appellate Tax Board (ATB) decision in this case, DOR concluded that, unless another state provided a full exemption for all Massachusetts contributory public employee pension income, there was no reciprocity, and income from a contributory public employee retirement fund of that state received by a Massachusetts resident could not be deducted from Massachusetts adjusted gross income.

The ATB decision for "Pariser" changed DOR's position. A Massachusetts resident may deduct income received from a contributory annuity, pension, endowment or retirement fund of another state or its political subdivisions if:

  • the other state has a specific income exclusion for pension income which applies to Massachusetts state or local contributory public employee pension plans; or
  • the other state has a specific deduction or exemption for pension income which applies to Massachusetts state or local contributory public employee pension plans; or
  • the other state has no income tax.

Example 1: A Massachusetts resident who is 62 years old receives $25,000 of pension income from a New York state contributory public employee pension fund. New York allows a deduction for pension income provided the recipient is 59 1/2 years old or older and the deduction is not in excess of $20,000. The Massachusetts resident is allowed a deduction in the amount of $20,000 for the New York pension income.

Example 2: A Massachusetts resident who is 58 years old and receives $15,000 of pension income from a New York state contributory public employee pension fund would not be allowed a deduction for any of the New York pension income since he has not attained the age of 59 1/2.

Example 3: State A has a personal income tax with a standard personal exemption of $10,000 applicable to any type of income, but no specific exclusion, deduction or exemption related to pension income. A Massachusetts resident receives $20,000 in gross income, including $15,000 in pension income from a contributory public employee pension fund in State A. No part of the $15,000 of pension income is deductible because the $10,000 personal exemption in State A is not specifically related to pension income.

Other State's Tax Treatment of Out-of-State Employee Contributory Government Pensions

Part-year residents are allowed to take this deduction if a contributory pension that is reciprocal is reported on Massachusetts Form 1-NR/PY. If a partial exclusion from income applies, the Massachusetts related exclusion must be reduced by the amount excluded in the former state during the same tax year.


Railroad Retirement Pension, Tier I and II

Tier I or Tier II railroad retirement benefits made to the employee are exempt from Massachusetts taxation. Railroad retirement lump-sum payments, commonly known as the insurance lump-sum payment and the residual payment, are exempt from Massachusetts taxation.

Tier I railroad retirement benefits are equivalent to social security benefits and are financed by equal payroll tax paid by employee and matched by employer. The term "social security benefits" includes Tier I railroad retirement benefits.

Tier II railroad retirement benefits are amounts in addition to the Tier I and are financed through a payroll tax, the most of which is paid by the employer. Tier II railroad benefits are exempt from state taxation under federal law.


U.S. Military Non-Contributory Pension

U.S. military pensions, which are included in federal gross income, are excluded from Massachusetts gross income.

U.S. Military pensions are pensions from the following uniformed services:

  • Air Force
  • Army
  • Coast Guard
  • Commissioned Corps of the Public Health Services and National Oceanic and Atmospheric Administration
  • Marine Corps
  • Navy

Junior Reserve Officers' Training Corps (JROTC): 
The ROTC Vitalization Act of 1964 provided for the establishment of JROTC Units at public and private schools and allowed for retired commissioned and noncommissioned officers to serve as instructors and administrators in JROTC units. The act states that the military may authorize qualified institutions to employ retired and noncommissioned officers as administrators and instructors.

The military pays to the institution an amount equal to one-half of the difference between the amount of the members' retired or retained pay and the active duty pay and allowance which the members would have received for that period if on active duty.

A retired member employed under these rules is not considered to be on active duty or inactive duty training for any purpose and therefore the pay may not be excluded from gross income.

For federal purposes, JROTC administrators and instructors claim I.R.C. s.134 as a reference for excluding a substantial portion of their wage income. For purposes of s.134, the term "qualified military benefit" means any allowance or in-kind benefit which is received by any member or former member of the uniformed services of the United States which was excludable from gross income on September 9, 1986 under provisions of law. A taxpayer's entitlement to income from the JROTC program is not received by reason of the taxpayer's status as a member or former member of the uniformed services, but rather is received as compensation for services rendered.


Veteran's Pension - G.L. c. 32, Sections 56-60

Veterans Who Began State Service prior to July 1, 1939: 
Taxpayers who retired under M.G.L. Chapter 32, Sections 56 - 60 and are veterans who began state service prior to July 1, 1939 are taxed on their pensions as follows:

  • at time of retirement, the retiree received a return of their contributions plus interest under Section 25 of Chapter 32. The lump sum distribution is not taxable;
  • subsequent to the lump sum distribution, any pension amount received is considered non-contributory, and is taxable.

Where to Report on Original Tax Return; What to Enclose:

Out-of-State Employee Contributory Government Pension

  • For residents, the amount of income must be reported on Mass Form 1, Line 4 as pensions; depending on the other state's tax treatment of Massachusetts pensions, some or all of the pension reported as income may then be excluded on Schedule Y, Line 13.
  • For part-year residents, the amount of income received as a resident must be reported on Mass Form 1-NR/PY, Line 6 as pensions; depending on the other state's tax treatment of Massachusetts pensions, some or all of the pension reported as income may then be excluded on Schedule Y, Line 13.

Documentation to Submit with Abatement/Amended Tax Return:

  • Copy of U.S. Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts;
  • Statement identifying the other state and the excludable or deductible amount.

Massachusetts References:

  • M.G.L. Chapter 62, Sections 2(a), 2(a)(1)(F), 2(a)(2)(E); 2(d)(1); 3B(a)(4)

Federal Pensions

Massachusetts Government Employees 457 Deferred Compensation Plan

Massachusetts Police or Fire Department Pension

Massachusetts State and Local Pension

MBTA Pension

Out-of-State Employee Contributory Government Pension

Railroad Retirement Pension, Tier I and II

TSA and TIAA-CREF

U.S. Military Non-Contributory Pension

Veteran's Pension

  • M.G.L. Chapter 32, Sections 56 - 60

Federal References:

  • I.R.C. ss. 61(a)(11); 101(h); 134; 403(b); 414(d), (h)(2); 417(c); 457; 2031
  • Public Law 107-16
  • 45 U.S.C.S. Section 231m
  • Revenue Ruling 71-307
  • 10 U.S.C., section 2031