PA withholding on 401(k) contribs

[HarleyBabe]

Just had a question about salary deferrals for PA residents. Have a PA resident whose employer is in DC. Apparently PA salary deferrals are subject to State tax but not Federal. How does the employer handle that when withholding and submitting contributions to the carrier?

Thanks

[ETA Consulting LLC]

Just had a question about salary deferrals for PA residents. Have a PA resident whose employer is in DC. Apparently PA salary deferrals are subject to State tax but not Federal. How does the employer handle that when withholding and submitting contributions to the carrier?

Thanks

From a tax reporting perspective, the employer would ensure the amounts are properly reflect in the State Income box on the W-2 Form as there would be no income tax exemption. The basis, however, should be kept in the plan to ensure they aren't taxed again during the ultimate distribution (assuming they are still PA residents).

Good Luck!

[HarleyBabe]

This is where I am confused. How do I track the basis if part is subject to tax but not subject to Federal. If I have a total dollar amount being deferred for a year, how do I account for it in the plan so when it's distributed, I can say that so much has already been subjected to state tax. I can't split it up and say this amount is prewitholding and this amount is post. It's one thing when you contribute ie Roth or 401(k) and they are in whole either prewitholding or not, but not a little of each.

[ETA Consulting LLC]

This is where I am confused. How do I track the basis if part is subject to tax but not subject to Federal. If I have a total dollar amount being deferred for a year, how do I account for it in the plan so when it's distributed, I can say that so much has already been subjected to state tax. I can't split it up and say this amount is prewitholding and this amount is post. It's one thing when you contribute ie Roth or 401(k) and they are in whole either prewitholding or not, but not a little of each.

Good question. You're already tracking the basis for Hardship Determinations. However, this doesn't differentiate the state (i.e. PA). If you have an individual who is a resident of PA for the entire employment, then the hardship basis would be the amount.

PA is the only state in the union with no income tax deduction for deferrals to 401(k) plans. NJ joins PA when it comes to 403(b) deferrals. Not sure many recordkeeping software systems consider this signficiant enough for reprogramming. Some of them, however, may have the flexibility to create it. Without it, the participant would end up paying State Tax twice.

Good Luck!

[mbozek]

This is where I am confused. How do I track the basis if part is subject to tax but not subject to Federal. If I have a total dollar amount being deferred for a year, how do I account for it in the plan so when it's distributed, I can say that so much has already been subjected to state tax. I can't split it up and say this amount is prewitholding and this amount is post. It's one thing when you contribute ie Roth or 401(k) and they are in whole either prewitholding or not, but not a little of each.

There is no need to track basis for PA tax purposes because retirement plan distributions after 59 1/2 are not subject to PA tax. If worker moves to another state distributions will be subject to state law of residence regarding taxaton of distributions, eg, NY exempts 20k of retirement distributions for each taxpayer from state & NYC income tax, NJ exempts all employee contributions to all plans/IRAs other than 401k from NJ tax regardless of whether employe lived in NJ when contributions were made, etc. Its the employee's problem to determine state tax liability.

[ETA Consulting LLC]

There is no need to track basis for PA tax purposes because retirement plan distributions after 59 1/2 are not subject to PA tax.

I was not aware of this, but was curious. Can you provide details as to whether age 59 1/2 is the only exception? Or, does it also extend to death or disability?

Good info!

Thanks

[mbozek]

There is no need to track basis for PA tax purposes because retirement plan distributions after 59 1/2 are not subject to PA tax.

I was not aware of this, but was curious. Can you provide details as to whether age 59 1/2 is the only exception? Or, does it also extend to death or disability?

Good info!

Thanks

Google PA income tax forms and look for PA-40 instructions. See P 12 or so. Actually any payments received after qualifing for retirement or death under a qualifying employer plan are exempt. Its only IRAs that are taxed prior to 59 1/2. Another quirk is that a direct rollover from a Q plan to a roth IRA is taxed but a direct rollover from a Q plan to a traditional IRA is not. Taxpayer can do tax free rollover from TIRA to roth IRA to avoid PA tax. go figure.

[david rigby]

I once did a little bit (but not enough) research on this. My brief overview made me wonder if the exempt portion applies only to certain plans: PA govt. plans and/or plans that were domiciled in PA. I state no conclusions, only warn you to be careful of the terminology used.

[mbozek]

I once did a little bit (but not enough) research on this. My brief overview made me wonder if the exempt portion applies only to certain plans: PA govt. plans and/or plans that were domiciled in PA. I state no conclusions, only warn you to be careful of the terminology used.

The PA 40 instructions state eligible employer plans can but do not necessarily include employer sponsored deferred comp plans; pension or profit shaing plans, 401k, thrift, thrift saving plans and employee welfare plans. Employees are supposed to ask the employer if their plan is an eligible employer plan which is highly unlikely if the employer does not do business in PA. I dont know how PA could even audit the pension distributions. There is nothing in the instructions that limits the exclusion to PA domiciled employers or state gov plans as NY does (NY exempts all distributions from govt pension plans from state and City income tax and exempts private plan, IRAs/403b/457 plan distributiions up to 20k per taxpayer). I think there are constitutional prohibitions against limiting the exemption for private plans to state domiciled employers as an impediment to interstate commerce under the US constitution, not to mention being politically impossible.