Steps to Determine Whether a Pension is Exempt from Kansas Tax Step Discussion Action 1 Is this a Railroad Retirement Board Benefit? If NO go to Step 3 2 Is Federal AGI over $75,000 If YES go to Step 12 If NO go to Step 13 3 Did the taxpayer receive the pension last year? If NO go to Step 6 4 Was the pension considered a Kansas Exempt Pension on last year s return? If NO go to Step 6 5 Are you comfortable with last year's determination? If YES go to Step 10 6 Discuss with the taxpayer whether the pension might possibly fit under one of the specified Kansas Exempt Pensions. Based on this discussion, do you think the pension might be exempt? If NO go to Step 13 7 Are you confident that the pension is exempt? If YES go to Step 11 8 9 To resolve concerns, discuss pension details with the taxpayer, payer, and plan administrator and review any documentation available. Additional Board of Regents and Washburn University pension information is included in this job aid. Are you able to arrive at a determination? Discuss with the Local Coordinator additional steps needed to determine whether pension is Kansas tax exempt. If YES go to Step 10 Go to Step 10 10 Is the pension tax exempt? If NO go to Step 13 11* 12* Take Federal taxable amount to TaxSlayer Kansas Return > Subtractions from Income page, Enter Qualified Exempt Retirement Benefits received in 2017 field and STOP Take taxable amount (amount that is included in 1040 line 20b) of 1099R box 5 TaxSlayer Kansas Return > Subtractions from Income page, Enter Qualified Exempt Retirement Benefits received in 2017 field and STOP 13 No TaxSlayer entries needed - STOP *A job aid is available at http://kssttc.org/ty2017/kansas%20tax%20exempt%20pensions.html to accumulate the total adjustment that goes in the Qualified Exempt Retirement Benefits field. KANSAS STTC 1
LIST OF KANSAS EXEMPT PENSIONS FROM THE KANSAS SCHEDULE S INSTRUCTIONS If the taxpayer receives retirement benefits exempt from Kansas income tax, the amount included in Federal AGI (generally 1099R box 2) is subtracted from Federal AGI so that it is not included in Kansas AGI and therefore taxed. This is accomplished through a Schedule S subtraction adjustment on line A11. Federal Civil Service Retirement or Disability Fund payments and other amounts received as retirement benefits from employment by the federal government or for service in the United States Armed Forces. Note: this includes Federal Thrift Savings Plan distributions. Retirement plans administered by the U.S. Railroad Retirement Board, including U.S. Railroad Retirement Benefits, tier I (RRB-1099 benefits equivalent to social security benefits*), tier II (RRB-1099-R), dual vested benefits, and supplemental annuities Kansas Public Employees' Retirement (KPERS) annuities Kansas Police and Fireman's Retirement System Pensions Distributions from Police and Fire Department retirement plans for the city of Overland Park, KS Kansas Teachers' Retirement annuities Kansas Highway Patrol pensions Kansas Justices and Judges Retirement System annuities Board of Public Utilities pensions Income from retirement annuity contracts purchased for faculty and others employed by the State Board of Regents or by educational institutions under its management with either their direct contributions or through salary reduction plans. Amounts received by retired employees of Washburn University as retirement and pension benefits under the university's retirement plan. Certain pensions received from Kansas first class cities that are not covered by KPERS * Caution: U.S. Railroad Board tier I benefits (RRB-1099) are treated as social security benefits by the TaxSlayer. Kansas DOES NOT tax ANY tier I benefits. For Federal AGI over $75,000, Kansas taxes a portion of social security benefits and the tier I benefits included with the taxable social security must be backed out of Kansas AGI on line A11. KANSAS STTC 2
Kansas Board of Regents Plans and Washburn University Plan If the taxpayer has distributions from a retirement plan that the taxpayer receives from another state, the benefits are not exempt from Kansas taxes. Income from retirement annuity contracts purchased for faculty and others employed by the State of Kansas Board of Regents or by educational institutions under its management with either their direct contributions or through salary reduction plans are exempt from Kansas tax and the amounts included and reported as part of their FAGI are subtracted on Kansas Form S, Line A19, PROVIDED the taxpayer can verify that the contract was an approved plan into which contributions were made when the taxpayer was employed. Current Board of Regents Employees and Washburn University do and have purchased mandatory salary reduction 403(b) annuities from any of the six "Approved Companies". In addition to the mandatory contributions, employees can also make voluntary salary reduction purchases from any of those companies or from any of several additional approved voluntary companies. The tax exemption on distributions from voluntary 403(b) annuities extend to those purchased from the additional approved voluntary companies per K.S.A. 74-4923(b). The exemption applies to mandatory and voluntary salary reduction 403(b) annuity distributions from "Approved Companies." Numerous companies provided 403(b) plans prior to 2008 when the rules governing these contracts changed. See the following pages for information on these companies. "If an employee, upon retirement or at any time rolls his mandatory 403(b) funds to a 403(b) offered by one of the additional approved voluntary companies the taxpayer's tax exempt status remains. This statement is important for rollovers. The rollover must be such that the 403(b) funds continue to be identifiable. If they are rolled into an IRA and comingled with any other non 403(b) funds, then the exemption from Kansas taxes is lost on those funds. If a spouse of a person who owns a 403(b) receives such all or part of a plan from a divorce settlement, the spouse is entitled to claim the tax exempt status provided that the 403(b) funds continue to be identifiable. KANSAS STTC 3
Employee Benefits Benefits for Active Employees Retirement Plans Kansas State Income Tax Exemption for 403(b) Plans (Updated 10/16/14) Copied November 03, 2017 From http://www.pittstate.edu/office/hr/docs/kansas-state-income-tax-exemption.dot 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, see Revenue Ruling included in this job aid. Q & A from Private Letter Rulings: 1. Q: "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?" A: 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." 2. Q: "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? A: Yes. KANSAS STTC 4
3. Q: "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). A: 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. 4. Q: "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." A: The distributions are exempt from Kansas income tax, pursuant to K.S.A 74-4923(b). 5. Q: "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." A: The distributions are exempt from Kansas income tax, pursuant to K.S.A. 74-4923(b). 6. Q: "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. A: 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. KANSAS STTC 5
7. Q: "The beneficiary rolls the proceeds into an "inherited IRA" and takes distributions as required by law." A: 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. 8. Q: "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." A: Yes. KANSAS STTC 6
Revenue Ruling Copied on November 03, 2017 From http://rvpolicy.kdor.ks.gov/pilots/ntrntpil/ipilv1x0.nsf/93850fcfe0c647ce8625655b004e9334/d611c3e c4dc0fbda862565750060060f?opendocument Ruling Number: 12-88-1 Tax Type: Individual Income Tax Brief Description: Kansas Income Tax Exemption; Retirement Annuities; Faculty and Others Employed by the Kansas State Board of Regents or by Educational Institutions Under Its Management. Revenue Notice 12-88-1 K.S.A. 74-4923(b) Kansas Income Tax Exemption Retirement Annuities of K.S.A. 74-4925 (1) (a) Faculty and Others Employed by the Kansas State Board of Regents or by Educational Institutions Under Its Management Advice has been requested as to whether certain faculty members, as retirement plan annuity participants, are exempt from Kansas income tax on distributions from these plans. Faculty and others employed by the State Board of Regents or by educational institutions under its management, and as defined by K.S.A. 74-4925 (1) (a) and K.S.A. 75-2935 (1) (f), are entitled to Kansas tax exemption on income derived from retirement annuity contracts purchased for them by the State Board of Regents with either their direct contributions or through salary reduction plans. Where annuity income is included in the adjusted gross income of federal tax returns, such taxpayers may make a subtraction from federal adjusted gross income on their Form K40 Kansas income tax returns. When any such retirement annuity contributions are not taxable for federal income tax purposes they are also not taxable for Kansas income tax purposes. Date Composed: 12/22/1997 Date Modified: 10/11/2001 KANSAS STTC 7
Notice 05-05 Copied on November 03, 2017 From http://rvpolicy.kdor.ks.gov/pilots/ntrntpil/ipilv1x0.nsf/93850fcfe0c647ce8625655b004 e9334/09f9e64656b2e977862570140060c856?opendocument Notice Number: 05-05 Tax Type: Individual Income Tax Brief Description: Kansas Income Tax Treatment of Certain Payments Received from the Regents Retirement Plan. Approval Date: 06/02/2005 KANSAS DEPARTMENT OF REVENUE OFFICE OF POLICY & RESEARCH NOTICE 05-05 Kansas Income Tax Treatment of Certain Payments received from The Regents Retirement Plan Advice has been requested concerning the income tax treatment of certain payments received from the Regents Retirement Plan. Introduction During the period of their employment, 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 civil service act are required by K.S.A. 74-4925 to contribute a percentage of their gross income to the Regents Retirement Plan (the Plan ). Contributions under this defined contribution (money purchase) plan are applied to the development of individual employee account balances and possible purchase of annuities from companies authorized by the Board to participate in the Plan. Plan contributions by a participant are made on a tax-deferred basis under an agreement for salary reduction executed in accordance with Section 403(b) of the Internal Revenue Code, subject to the rules and regulations adopted by the Board and the requirements of the selected investment providers. The Board has selected Teacher Insurance Annuity Association College Retirement Equities Fund ( TIAA-CREF ), the Aetna Life Insurance and Annuity Company, Lincoln National Pension Company and the Security Benefit Life Insurance Company ( alternative investment providers ) to provide alternative investment options to participants in the Plan. KANSAS STTC 8
Each eligible employee is responsible for selecting an alternative investment provider and the alternative investment options to which the employee s basic retirement contributions under the Plan, as provided for by K.S.A. 74-4925, as amended, are to be deposited. The employee may utilize all alternative investment options offered by the alternate investment provider selected by the employee within the limitations of the agreement between the Board and the alternate investment provider and the employee s contract with the alternate investment provider. At any time before retirement, a participant can transfer funds accumulated under the Plan from one alternate investment provider to another, subject to the established policies of the approved companies and in accordance with applicable Internal Revenue Service requirements. For a participant who has terminated employment, the Plan s transferability rules continue to govern funds accumulated under the Plan. However, if the participant later participates in another employer s Internal Revenue Code Section 403(b) definedcontribution retirement plan, the transferability rules of the subsequent employer s plan will govern funds accumulated under the Plan. Upon retirement, a participant is entitled to receive a benefit under any one of the options available from the approved company handling all or a portion of the participant s account(s). Distributions are available only upon termination of employment, retirement or phased retirement. A terminated or retired participant in the Plan has full access to all accumulations, including the portion attributable to Plan contributions made by the employing institution. Participants in the phased retirement program have access to up to 99% of all accumulations, including the portion attributable to Plan contributions made by the employing institution. As a rule these payments are taxable for federal income tax purposes. Therefore, these payments are generally included in federal adjusted gross income. Kansas law requires the use of federal adjusted gross income as the starting point for computing the Kansas income tax. Certain addition or subtraction modifications are then made in accordance with K.S.A. 79-32,117. Subsection (c)(ii) of K.S.A. 79-32,117 provides that Any amounts received which are included in federal adjusted gross income but which are specifically exempt from Kansas income taxation under the laws of the state of Kansas are to be subtracted from federal adjusted gross income prior to computing the Kansas income tax. All Plan benefits are specifically exempt from Kansas income tax. The exemption is found in K.S.A. 74-4923(b), which states, in pertinent part: (b) 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 or any political subdivision or taxing body of the state;..... KANSAS STTC 9
Questions have arisen as to how the exemption from Kansas income tax contained in K.S.A. 74-4923(b) should be claimed with regard to payments from Plan membership accounts and related accounts. This process is discussed in the context of the manner in which payments are likely to be received: Direct one-time payments, monthly payments, and rollover payments. Generally In order to qualify for exemption from Kansas income tax, payments received by a Plan participant must meet two requirements. First, the payment must be received directly from companies authorized by the Board to participate in the Plan: Teacher Insurance Annuity Association College Retirement Equities Fund ( TIAA-CREF ), the Aetna Life Insurance and Annuity Company, Lincoln National Pension Company and the Security Benefit Life Insurance Company. Second, the payment must be included in the member s federal adjusted gross income in the year it is received. Payments that are not included in the member s federal adjusted gross income in the year of receipt and payments that are not received directly from companies authorized by the Board to participate in the Plan are not exempt. Direct One-Time Payments A Plan participant who ceases covered employment may have the right to withdraw part or all of their accumulated contributions and have this amount paid directly to them. Upon withdrawal the contributions will be taxable for federal income tax purposes and included in federal adjusted gross income. Similarly, a retiring Plan participant may have the right to take part or all of their retirement benefit in a lump sum. The amount of the lump-sum payment will be included in federal adjusted gross income. Because these payments are received directly from companies authorized by the Board to participate in the Plan and are included in the Plan participant s federal adjusted gross income in the year received they are exempt from Kansas income tax. In order to claim the exemption from Kansas income tax for direct one-time payments of withdrawn contributions or partial lump sum payments a subtraction modification should be made on the Kansas income tax return. This modification should be an amount equal to the amount of the withdrawn accumulated contributions or partial lump-sum payment. The effect of the modification will be to remove the accumulated contributions or partial lump-sum payment from Kansas taxable income. Monthly Payments Monthly payments from Plan accounts are taxable for federal income tax purposes and included in federal adjusted gross income. KANSAS STTC 10
Because these payments are received directly from companies authorized by the Board to participate in the Plan and are included in the Plan participant s federal adjusted gross income in the year received they are exempt from Kansas income tax. In order to claim the exemption from Kansas income tax for the monthly payments a subtraction modification should be made on the Kansas income tax return. This modification should be an amount equal to the total amount of the monthly payments. The effect of the modification will be to remove the monthly payments from Kansas taxable income. Transfer and Roll-Over Payments At any time before retirement, a participant can transfer funds accumulated under the Plan from one alternate investment provider to another, subject to the established policies of the approved companies and in accordance with applicable Internal Revenue Service requirements. Because these transfers are not included in federal adjusted gross income no modification is made on the Kansas income tax return. For a participant who has terminated employment, the Plan s transferability rules continue to govern funds accumulated under the Plan. However, if the participant later participates in another employer s Internal Revenue Code Section 403(b) definedcontribution retirement plan, the transferability rules of the subsequent employer s plan will govern funds accumulated under the Plan. Because these transfers are not included in federal adjusted gross income no modification is made on the Kansas income tax return. Federal law permits rollovers of funds accumulated under the Plan into a variety of qualified retirement accounts. In some cases the funds may be placed into a segregated account, such as a traditional IRA. In many cases, however, rollovers from the Plan are deposited into qualified accounts where they will be commingled with other retirement funds. By way of example, the receiving account for Plan rollover distributions may be another employer retirement plan. Once funds paid out of the Plan are rolled over into a qualified account they lose their characterization as Plan payments and become assets of the qualified account. Payments from rollover accounts are received in a variety of ways, including as a lump sum and as annuitized payments (periodic or monthly payments), such as a monthly payment from an annuity. When a payment is received, it will be included in federal adjusted gross income. However, none of the payments made from a rollover account are paid directly by companies authorized by the Board to participate in the Plan. Because rollover of a Plan payment deposited into a qualified retirement account is not included in federal adjusted gross income in the tax year when the Plan payment was made and it has lost its characterization as a Plan payment, payments from that KANSAS STTC 11
account are not exempt from Kansas income tax. Therefore, no modification is made on the Kansas income tax return for a payment from a rollover account. Taxpayer Assistance Additional copies of this notice, forms or publications are available from our web site, www.ksrevenue.org. If you have questions about income tax, please contact: Taxpayer Assistance Center Kansas Department of Revenue 915 SW Harrison St., 1st Floor Topeka, KS 66612-1588 Phone: 785-368-8222 Hearing Impaired TTY: 785-296-6461 Fax: 785-291-3614 Date Composed: 06/02/2005 Date Modified: 06/02/2005 KANSAS STTC 12