Kansas State Income Tax Exemption for 403(b) Plans

Kansas State Income Tax exemption for 403(b) Plans

The Kansas Department of Revenue has ruled that income derived from any approved Kansas board of regents 403(b) plan is exempt from Kansas State income tax.

  1. The Kansas Department of Revenue Ruling #12-88-1 can be found here.
  2. The Kansas Individual Income Tax and Food Sales Refund booklet provides information on Schedule S Line by Line instructions. Part A addresses modifications to Federal Adjusted Gross Income and Subtractions from Federal Adjusted Gross Income include “Line A10– Exempt Retirement Benefits” which includes the Kansas Board of Regents plan as well as other listed “Kansas Pension Plans”.
  3. Kansas Income Tax Treatment of Certain Payments Received from the Regents Retirement Plan Notice 05-05 can be found here
  4. 403(b) funds converted directly to a Roth IRA retain SOK tax exemption. Kansas Department of Revenue Letter, dated December 4, 2012.
  5. Following are copies of Kansas Department of Revenue Private Letter rulings:


STATE OF KANSAS
Bill Graves, Governor


Office of Policy & Research
Shirley K. Sicilian, Director
915 SW Harrison St.
Topeka, KS 66612-1588

DEPARTMENT OF REVENUE
Karla Pierce, Secretary

(785)
296-3041
FAX (785) 296-7928
Hearing Impaired TTY (785) 296-3909
Internet Address: www.ink.org/public/kdor


June 16, 1999


XXXxXXxxXxX
XXXxXxxXXXX
XXXxXXXXXXXXX



Dear XXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated XXXXXXXXX.

You requested that the department clarify certain issues pertaining to the taxation of board of regents 403(b) retirement plans.

K.S.A 74-4923(b) states:

Any annuity, benefits, funds, property or rights created by, or accruing to any person under the provisions of K.S.A. 74-4901 et seq. or 74-4951 et seq., and amendments thereto, shall be exempt from any tax of the state of Kansas [emphasis added] or any political subdivision or taxing body of the state; shall not be subject to execution, garnishment or attachment, or, except as otherwise provided, any other process or claim whatsoever; and shall be unassignable, except that within 30 days after the death of a retirant the lump-sum death benefit payable to a retirant's beneficiary pursuant to the provisions of K.S.A. 74-4989 and amendments thereto may be assignable to a funeral establishment providing funeral services to the retirant by the beneficiary of such retirant. Any annuity or benefit or accumulated contributions due and owing to any person under the provisions of K.S.A. 74-4901 et seq. or 74- 4951 et seq. and amendments thereto are subject to claims of an alternate payee under a qualified domestic relations order. As used in this subsection, the terms "alternate payee" and "qualified domestic relations order" shall have the meaning ascribed to them in section 414(p) of the United States internal revenue code of 1954, as amended. The provisions of this act shall apply to any qualified domestic relations order which is in effect on or after July 1, 1994. The Kansas public employees retirement system shall not be a party to any action under article 16 of chapter 60 of the Kansas Statutes Annotated, and amendments thereto, but is subject to orders from such actions issued by the district court of the county where such action was filed and may also accept orders which it deems to be qualified under this subsection from courts having jurisdiction of such actions outside the state of Kansas. Such orders from such actions shall specify either a specific amount or specific percentage of the amount of the pension or benefit or any accumulated contributions due and owing from the system to be distributed by the system pursuant to this act.



K.S.A. 74-4925(1) states:

The state board of regents shall:

(a) Assist all those members of the faculty and other persons who are employed by the state board of regents or by educational institutions under its management and who are in the unclassified service under the Kansas civil service act as provided in subsection (1)(f) of K.S.A. 75-2935 and amendments thereto, except health care employees, as defined by subsection (1)(f) of K.S.A. 75-2935 and amendments thereto, in the purchase of retirement annuities for their service rendered after December 31, 1961. Effective on the first day of the first payroll period commencing with or following July 1, 1994, county extension agents employed by Kansas state university under K.S.A. 2-615 and amendments thereto shall be eligible for assistance by the state board of regents in the purchase of retirement annuities under this section. The state board of regents shall not assist any such person who is employed after December 31, 1961, until such person has been employed for a waiting period of at least one year except that (i) the state board of regents may assist any newly employed person immediately if at the time of the commencement of employment the person is covered by a valid retirement annuity contract issued by a company described in subsection (2) which was entered into pursuant to a retirement pension plan adopted for faculty members or other persons, or both, employed by an institution of higher education and to which such person or such person's employer on such person's behalf has been making contributions for at least one year, and (ii) all periods of employment with (A) participating employers under the Kansas public employees retirement system, for which employment participating service credit accrued, or (B) institutions of higher education in other states for which employment retirement benefits accrued under a retirement system or plan provided for such employment, shall be credited toward satisfaction of such one-year waiting period if served, in either case, during the five years immediately preceding employment with the state board of regents or with an educational institution under its management in the unclassified service under the Kansas civil service act as provided in subsection (1)(f) of K.S.A. 75-2935 and amendments thereto, in addition to such employment with the state board of regents or with educational institution under its management; no period of employment as a student employee, as a seasonal or temporary employee or as a part-time employee, whose employment requires less than 1,000 hours of work per year, shall be credited toward the one-year waiting period under subsection (1)(a); this act shall not apply to persons employed in such temporary and part-time positions designated by the state board of regents as exceptions hereto;



K.S.A. 74-4925b, states:

Tax sheltered annuities for certain employees; rules and regulations; "compensation" defined. The state board of regents may establish a procedure whereby any person employed by any educational institution under its control who is not described in clause (a) of subsection (1) of K.S.A. 74- 4925 and including unclassified employees who are members of the cooperative extension service and appointed pursuant to the federal Smith-Lever Act, as amended, may, subject to rules and regulations of said board of regents, request said board of regents in writing for a reduction in compensation and the contribution thereof for tax sheltered annuities as permitted under the provisions of the internal revenue code of 1954, as amended. For the purposes of the Kansas public employees' retirement system, "compensation" as used in this act shall have the meaning ascribed thereto in K.S.A. 74-4932 and for cooperative extension service employees compensation shall mean the total of all salaries and wages paid by the federal, state and county for personal services performed as a member of the cooperative extension service.

You asked the following questions:

"board of regents employees can purchase mandatory salary reduction 403(b) annuities from any of the four "Approved Companies". In addition to the mandatory contributions, employees can also make voluntary salary reduction purchases from any of those four companies or from any of several additional approved voluntary companies. Does the tax exemption on distributions from voluntary 403(b) annuities extend to those purchased from the additional approved voluntary companies?"

Answer: Distributions from the Regents Retirement Plan are exemption from the Kansas income tax per K.S.A. 74-4923(b). The exemption would apply to mandatory and voluntary salary reduction 403(b) annuity distributions from "Approved Companies."

"If an employee, upon retirement rolls his mandatory 403(b) funds to a 403(b) offered by one of the additional approved voluntary companies, does his tax exempt status remain?"

Answer: Yes.

"If an employee rolls an annuity which qualifies to be exempt from state income tax, to a 403(b) annuity offered by a company not included in either the voluntary or mandatory approved company list, does it retain its tax exempt status? (You have addressed this question in the past as it pertains to rolling over to an IRA, but I am unaware of any addressing of the issue as it pertains to rollovers to another 403(b).

Answer: No, the exemption from the Kansas income tax as contained in K.S.A. 74-4923(b) would not apply to distributions from plans other than "approved" mandatory or "approved" voluntary salary reduction 403(b) annuity plans.


This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially affects this private letter ruling.

Sincerely,


Mark D. Ciardullo
Tax Specialist


MDC



STATE OF KANSAS
Bill Graves, Governor


Office of Policy & Research
Shirley K. Sicilian, Director
915 SW Harrison St.
Topeka, KS 66612-1588

DEPARTMENT OF REVENUE
Karla Pierce, Secretary

(785)
296-3041
FAX (785) 296-7928
Hearing Impaired TTY (785) 296-3909
Internet Address: www.ink.org/public/kdor


August 28, 2000


XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX



Dear XXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated June 19,2000.

You requested that the department clarify certain issues pertaining to the taxation of board of regents 403(b) retirement plans.

KS.A 74-4923(b) states:

Any annuity, benefits, funds, property or rights created by, or accruing to any person under the provisions of K.S.A. 74-4901 et seq. or 74-4951 et seq., and amendments thereto, shall be exempt from any tax of the state of Kansas (emphasis added) or any political subdivision or taxing body of the state; shall not be subject to execution, garnishment or attachment, or, except as otherwise provided, any other process or claim whatsoever; and shall be unassignable, except that within 30 days after the death of a retirant the lump-sum death benefit payable to a retirant's beneficiary pursuant to the provisions of K.S.A. 74-4989 and amendments thereto may be assignable to a funeral establishment providing funeral services to the retirant by the beneficiary of such retirant. Any annuity or benefit or accumulated contributions due and owing to any person under the provisions of K.S.A. 74-4901 et seq. or 74-4951 et seq. and amendments thereto are subject to claims of an alternate payee under a qualified domestic relations order. As used in this subsection, the terms "alternate payee" and "qualified domestic relations order" shall have the meaning ascribed to them in section 414(p) of the United States internal revenue code of 1954, as amended. The provisions of this act shall apply to any qualified domestic relations order which is in effect on or after July 1, 1994. The Kansas public employees retirement system shall not be a party to any action under article 16 of chapter 60 of the Kansas Statutes Annotated, and amendments thereto, but is subject to orders from such actions issued by the district court of the county where such action was filed and may also accept orders which it deems to be qualified under this subsection from courts having jurisdiction of such actions outside the state of Kansas. Such orders from such actions shall specify either a specific amount or specific percentage of the amount of the pension or benefit or any accumulated contributions due and owing from the system to be distributed by the system pursuant to this act.



K.S.A. 74-4925(1) states:

The state board of regents shall;

(a) Assist all those members of the faculty and other persons who are employed by the state board of regents or by educational institutions under its management and who are in the unclassified service under the Kansas Civil Service Act as provided in subsection (l)(f) of K.S.A. 75-2935 and amendments thereto, except health care employees, as defined by subsection (I)(f) of K.S.A. 75-2935 and amendments thereto, in the purchase of retirement annuities for their service rendered after December 31, 1961. Effective on the first day of the first payroll period commencing with or following July 1, 1994, county extension agents employed by Kansas State University under K.S.A. 2-615 and amendments thereto shall be eligible for assistance by the state board of regents in the purchase of retirement annuities under this section. The state board of regents shall not assist any such person who is employed after December 31, 1961, until such person has been employed for a waiting period of at least one year except that (i) the state board of regents may assist any newly employed person immediately if at the time of the commencement of employment the person is covered by a valid retirement annuity contract issued by a company described in subsection (2) which was entered into pursuant to a retirement pension plan adopted for faculty members or other persons, or both, employed by an institution of higher education and to which such person or such person's employer on such person's behalf has been making contributions for at least one year, and (ii) all periods of employment with (A) participating employers under the Kansas public employees retirement system, for which employment participating service credit accrued, or (B) institutions of higher education in other states for which employment retirement benefits accrued under a retirement system or plan provided for such employment, shall be credited toward satisfaction of such one-year waiting period if served, in either case, during the five years immediately preceding employment with the state board of regents or with an educational institution under its management in the unclassified service under the Kansas Civil Service Act as provided in subsection (1 )(f) of KS.A. 75-2935 and amendments thereto, in addition to such employment with the state board of regents or with educational institution under its management; no period of employment as a student employee, as a seasonal or temporary employee or as a part-time employee, whose employment requires less than 1,000 hours of work per year, shall be credited toward the one-year waiting period under subsection (l)(a); this act shall not apply to persons employed In such temporary and part-time positions designated by the state board of regents as exceptions hereto;



K.S.A. 74-4925b states:

Tax sheltered annuities for certain employees; rules and regulations; "compensation" defined. The state board of regents may establish a procedure whereby any person employed by any educational institution under its control who is not described in clause (a) of subsection (1) of K.S.A. 74-4925 and including unclassified employees who are members of the cooperative extension service and appointed pursuant to the federal Smith-Lever Act, as amended, may, subject to rules and regulations of said board of regents, request said board of regents in writing for a reduction in compensation and the contribution thereof for tax sheltered annuities as permitted under the provisions of the internal revenue code of 1954, as amended. For the purposes of the Kansas public employees' retirement system, "compensation" as used in this act shall have the meaning ascribed thereto in K.S.A. 74-4932 and for cooperative extension service employees compensation shall mean the total of all salaries and wages paid by the federal, state and county for personal services performed as a member of the cooperative extension service.

In your letter you stated:

"In accordance with the provisions of K.S.A. 74-4923(b), would the beneficiaries of a 403(b) plan purchased under an employment agreement with the board of regents, be exempt from Kansas [income] tax with regards to distributions after death of the participant under the following scenarios:"

"The beneficiary elects to leave the proceeds in the deceased participant's existing account and take distributions when required by [federal] law."

Answer: The distributions are exempt from Kansas income tax, pursuant to K.S.A 74-4923(b).

"A spouse beneficiary, that is also employed by the board of regents or retired from the board of regents employment, elects to roll the 403(b) plan with an "approved company" in his/her own name and take distributions as required by law."

Answer: The distributions are exempt from Kansas income tax, pursuant to K.S.A. 74-4923(b).

"A spouse beneficiary, not employed by the board of regents, but otherwise qualified to establish a 403(b) plan, elects to roll the 403(b) plan into a 403(b) plan of his/her own and take distributions as required by law.

Answer: This appears to result in the commingling of at least two 403(b) accounts that do not share the same tax exemption for Kansas state income tax. Therefore, accountability is questionable and we decline to extend the exemption in this scenario.

"The beneficiary rolls the proceeds into an "inherited IRA" and takes distributions as required by law."

Answer: This appears to result in the commingling of 403(b) account funds and the funds of an inherited IRA that do not share the same tax exemption for Kansas State Income Tax. Therefore, accountability is questionable and we decline to extend the exemption in this scenario.

"In addition, if a board of regents retirement plan is divided pursuant to a qualified domestic relations order (QDRO), would the state tax exemption apply to the new spousal account if the spouse leaves the money with an approved company."

Answer: Yes.


Sincerely,



Mark D. Ciardullo
Tax Specialist


MDC