Preemption re: state tax withholding

[Guest]

Anyone ever consider why mandatory state tax withholding is not preempted under ERISA?

[MoJo]

It's probably because preemption applies to only those things which are inconsistent with the federal statute. State and local income taxation of retirement plan distributions is not inconsistent with either the letter or spirit of ERISA. The point of the plan is tax deferred income, not tax free....

[Guest]

I don't see in section 514 where it says the laws have to be inconsistent with ERISA. And imposing these 50 rules is certainly a burden on plans. I'm not saying the taxation of the individual participant is pre-empted; I think that's personal income tax law. It is a burden on plans to have 50 different withholding rules.

[david rigby]

I agree with MoJo that the general ERISA preemption is not relevant to this issue, although I cannot point to any reg specifically. I believe the burden of withholding is on the trustee, not the plan itself.

Also, you might want to review this link for state information. http://www.cigna.com/retirement/sponsor/y2ksw_w.html

[Guest]

I don't think it matters that the trustee has to withhold--it's still a state burden on ERISA plans. Thanks for everyone's input.

[Guest]

I beleive the regs specifically authorize state withholding as not violating the anti-alienation rules. It would seem that it is not therefore preempted.

FINAL-REG, PEN-FINAL-REG, §1.401(a)-13. Assignment or alienation of benefits

(2) Specific arrangements not considered an assignment or alienation. The terms “assignment” and “alienation” do not include, and paragraph (e) of this section does not apply to, the following arrangements:

(ii) Any arrangement for the withholding of Federal, State or local tax from plan benefit payments,

[MoJo]

It is a maxim of the law that state sovereignty is supreme, unless specifically reserved by the Constitution (or the laws promulgated under it - including ERISA). The state tax withholding issue isn't unigue to ERISA plans - it is applicable to all trusts (personal, etc.) with multi-state beneficiaries. I agree a uniform approach would be nice, but don't think the feds should be messing in state tax withholding issues.

[Guest]

b2kates, interesting point.

[Kirk Maldonado]

Although I don't have a citation to it, I know that there is a court case right on point; holding those state laws are not preempted.

[Guest]

I didn't see the case, but I saw a cite to Adv Op 86-09 which says personal income tax laws aren't preempted. I don't know if that addresses the mandatory withholding issue though.

[Guest]

This discussion does not address the nexus issue for mandatory states. What if only the participant lives in the state and the plan or plan sponsor has no other connection to the state, is the plan still subject to mandatory withholding?

As an accomadation (spelling?), as Trustee, we deposit in every state where participants live regardless of the technical nexus issue. However, we have had some plan sponsors who refuse to permit such withholding deposits claiming no nexus.

[pjkoehler]

In Retirement Fund Trust v. Franchise Tax Board, 909 F.2d 1266 (9th Cir. 1990), the Ninth Circuit held that California procedures for collecting state income tax at the source (withholding) with respect to benefits paid by an ERISA welfare benefit plan were not preempted by ERISA. The Court observed that the Supreme Court has already held that, in other contexts, the judicial process of garnishment, which is not preempted as it applies to ERISA welfare benefit plans, is functionally indistinguishable from the nonjudicial process of tax collection. See Mackey v. Lanier, 486 U.S. 832, 834 (1988). Plan trustees argued that the state tax withholding statute impermissibly "related to" to the plan, within the meaning of ERISA Sectin 514(a), because it used the amount of the benefit as a basis for computing the tax and because the result of withholding was a dissipation of the benefit. In rejecting these arguements, the Ninth Circuit reasoned that the state law withholding requirement was based on the state's estimate of the employee's total income from all sources, of which the ERISA plan income was only a part. The Court noted that the trustees did not contend that the plan benefits were not taxable. Therefore, the state procedures for withholding at the source did not dissipate the net plan benefits.

[This message has been edited by PJK (edited 06-06-2000).]