Technical Information Release  TIR 02-7: Massachusetts Exclusion Amounts For Retirement Plan Elective Deferrals For Tax Year 2002

Date:	05/09/2002
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

Personal Income Tax

This Technical Information Release explains the retirement plan contribution amounts that may be excluded from an individual's gross income for tax year 2002 for purposes of Massachusetts personal income tax.

Massachusetts follows the Internal Revenue Code ("Code") as of January 1, 1998 for most purposes of the personal income tax. G.L. c. 62, § 1(c). Massachusetts does not adopt any change made since that date unless an exception exists or the Legislature enacts a provision specifying different treatment. Massachusetts allows an individual to exclude from gross income an elective deferral contributed to a retirement plan up to a certain amount determined under the Code. For Massachusetts provisions following the Code as of January 1, 1998, this amount will not reflect the changes made by the federal Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). (Public Law 107-16, enacted on June 7, 2001.) The effect of incorporating the 1998 Code for certain retirement plans is that, in some cases, an individual is not allowed to exclude from Massachusetts gross income the entire amount excludible from gross income for federal income tax purposes.

Treatment of retirement plan elective contributions for tax year 2002 are shown in the table below. Those Massachusetts exclusion amounts based on the January 1, 1998 Code are derived from inflation adjustment calculations and, thus, may increase in future tax years. Also, pursuant to EGTRRA, the federal exclusion amounts and the Massachusetts exclusion amounts tied to the current Code will increase in future tax years.

Massachusetts allows a deduction for the portion of plan distributions that were previously subject to Massachusetts personal income tax. 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).

The Massachusetts Legislature is considering whether to adopt current Code treatment for those Massachusetts retirement plan elective contributions currently based on the January 1, 1998 Code. If such legislation is enacted, the Department will issue an updated Technical Information Release that provides the new deferral amounts for 2002.


2002 Income Tax Treatment of Retirement Plan Elective Contributions
 

Pension Plan/Code Section	Massachusetts Code Tie-In Date	Federal Exclusion Amount	Massachusetts Exclusion Amount	Additional Massachusetts Gross Income
SIMPLE IRA / s. 408(p)	01/01/98	$7,000	$6,500	$500
Additional age 50 catch-up contributions/SIMPLE IRA	Not applicable	$500	$0	$500
Massachusetts State and Local Government Deferred Compensation Plan/ s. 457	Current(i)	$11,000(ii)	$11,000 or same amount allowed federally	0
§ 457 Plans Other Than Massachusetts State and Local Government Plans	01/01/98	$11,000(iii)	The lesser of $9,000 or 33 1/3% of employee's compensation(iv)	Difference between federal exclusion and Massachusetts exclusion
Annuity Contract / s. 403(b)	01/01/98	$11,000	In general, $11,000 (v), (vi)	In general, 0
s. 401(k) Plan; s. 408(k) Salary reduction SEP(vii)	01/01/98	$11,000	$11,000(viii)	0
Additional age 50 catch-up contributions/ s. 401(k), s. 403(b), s. 408(k) SEP, and s. 457 Plans	Not applicable	$1,000	0	$1,000

 

Footnotes

i. G.L. c. 29, ss. 64 - 64D.

ii. An additional catch-up amount of up to $11,000 is available for certain participants during the last three years before normal retirement age under the plan. s. 457(b)(3)(2002 Code).

iii. An additional catch-up amount may be deferred by certain participants. See similar situation in footnote 2.

iv. Section 457(b)(1998 Code). An additional amount may be deferred under the rules of the 1998 Code in Massachusetts. During a participant's last three years before normal retirement age under the plan, the limit is increased to the lesser of (1) $15,000 or (2) 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 deferrals for that year. Section 457(b)(3)(1998 Code).

v. Under the 1998 Code, there are three independent limits on the amount excludible: (1) the s. 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 s. 415. Salary reduction contributions in excess of the s. 402(g) limitation are includible in the employee's gross income in the year contributed. Contributions in excess of the more restrictive of the s. 403(b) and s. 415 limits are taxable under s. 403(c) when they become substantially vested. For most taxpayers, the test will result in an amount of $11,000 for 2002. The amount excludible under the 1998 Code is the same as the federal amount for 2002 by coincidence: the inflation adjustment amount for 2002 of $500 brings the total ($10,500 in 2001 plus inflation adjustment amount) to $11,000.

vi. Additional elective deferrals may be made by employees with 15 or more years of service in the case of a "qualified organization" under s. 402(g)(8) (1998 Code).

vii. Elective SEP-IRA contributions made by employees through salary reduction arrangements (also referred to as SARSEPs).

viii. The amount excludible under the 1998 Code is the same as the federal amount for 2002 by coincidence: the inflation adjustment amount for 2002 of $500 brings the total ($10,500 plus inflation adjustment amount) to $11,000.