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Letter Ruling

Letter Ruling Letter Ruling 89-1: Military Retirement Benefits

Date: 02/16/1989
Referenced Sources: Massachusetts General Laws

Personal Income Tax

You ask whether military retirement benefits are taxable to Massachusetts residents.

Income from certain retirement funds is exempt form Massachusetts taxation., G.L. c. 62, § 2(a)2(E) specifically provides that Massachusetts gross income is federal gross income minus "income form any contributory.... retirement fund of the United States which the employee has contributed." the funding form the military retirement system comes entirely form the employer, the United States. We conclude that because military personnel do not actually contribute to their retirement system, military retirement pay is not exempt under G.L. c. 62 § 2(a)2(e).

As you know, the federal government, 27 other states and the District of Columbia also treat military retirement pay as taxable. We have examined the Massachusetts stature carefully to see whether and exception can be made for military pensions. However, the statute as it is currently written exempts only income form contributory retirement funds of the United States government, and the military retirement system is clearly not contributory. We are constrained to interpret and administer the law as it is written.

As the statute does not accommodate the interpretation you advocate and the relief you seek here, the only way to change the current tax treatment of military pensions is to change the law itself. We understand that a bill is pending in the Legislature now, as in previous years,to amend the law on behalf of those military retirees who are at least 60 years of age. As this bull moves through the General court, we will certainly provide you with any technical assistance you need.

Table of Contents


The military retirement system, is a "funded noncontributory defined-benefit plan,"1 Historically, military retirement benefits were as unfunded liability on the U.S. Treasury. Effective October 1, 1984 congress established the Department of Defense Military Retirement Fund ("Fund") administered by the Secretary of the Treasury to be used for the accumulation of funds to finance military retirement liability of the Department of Defense. 10 U.S.C. § 1461. The Treasury continues to pay for unfunded liabilities.


Massachusetts law exempts from tax income from any contributory U.S. government retirement fund to which the employee has contributed. G.L. c. 62, § 2(a)2(E). It is clear that military personnel do not receive income and then contribute a portion to the retirement fund. You tell us, however, that federal legislative history of various pay acts shows that military pay is depressed as compared to federal civilian pay to reflect an "imputed contribution" toward the members' retirement. You argue that these imputed contributions are contributions within the meaning of G.L. c. 62, § 2(a)2(E). Unfortunately, we cannot agree.

The United States Code does not refer to imputed contributions to military retirement. The legislative history as a whole is inconclusive as to whether military pay is depressed to reflect imputed contributions, and examples can be found supporting both sides of the question.

For example, the House Committee on Armed Services commissioned a study of military and civilian pay scales in 1965 to determine an appropriate military pay increase. In discussing its proposed pay increase, the Committee stated that "[a]fter determination was made of the level of pay...account was taken of an imputed 61/2-percent contribution to retirement.... The importance of this step is that it would set out 'in the record' the actual amounts by which military pay scales are lowered because of the military 'noncontributory' retirement system...."2

By contrast, in 1971 the Senate Armed Services Committee, in considering legislation to amend the military Selective Service Act of 1967, wrote " since there is no accepted comparability system linking the various military and civilian pay grades, it cannot therefore be reasonably said that military basic pay is being depressed by any percentage as an imputed contribution toward reducing military retired costs."3

You also point out that until 1982 federal civilian employees were allowed to include military service as "creditable service" toward measuring their retirement with no requirement to "deposit' or make u contributions to cover the years added. In 1982 congress amended the law to require make-up contributions but apparently the changes were intended to prevent federal civilian employees from using military service as "creditable service" toward both civil service retirement and the social security system.4 You suggest that this shows that the federal government equates the military imputed contributions with the actual contributions made by federal civilian employees.the significance of the pre-1982 use of military service as creditable service (without make-up payments) toward federal civil service retirement is questionable. but even if we assume for purposed of discussion that military pay is depressed and personnel do make "imputed" contributions, such contributions are not "contributions" with the meaning of G.L. c. 62, § 2(a)2(E). The plain meaning of the word "contributory" and the phrase "to which the employee has contributed" requires us to limit he exemption to income from retirement funds to which the employees actually contribute.

Very truly yours,
/s/ Stephen Kidder
Stephen W. Kidder,
Commissioner of Revenue
February 16, 1989
LR 89-1

  1. FY1986 Department of Defense Statistical Report on the Military Retirement System (RSC No. DDM(A) 1875), at 1.(1)
  2. H.R. Rep. No. 549. 89th Cong., 1st Sess. 24.(2)
  3. S. Rep. No. 93, 92nd Cong., 1st Sess. 35, reprinted in 1971 U.S. CONG. & AD. NEWS 1439, 1463.(3)
  4. 5 U.S.C. § 8332(c) and 5 U.S.C. § 8332 (j).
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