Nontaxable pension rollovers and unemployment benefits

UIPL10-09acc.pdf (https://www.dol.gov/sites/dolgov/files/ETA/advisories/UIPL/2009/UIPL10-09acc.pdf)

                                                          CLASSIFICATION
         EMPLOYMENT AND TRAINING                          Retirement Pay
      ADMINISTRATION ADVISORY SYSTEM                      CORRESPONDENCE SYMBOL
         U.S. DEPARTMENT OF LABOR                         OWS/DL
              Washington, D.C. 20210                      DATE
                                                          January 16, 2009


ADVISORY:         UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 10-09

TO:               STATE WORKFORCE AGENCIES

FROM:             BRENT R. ORRELL /s/
                  Deputy Assistant Secretary

SUBJECT:          Treatment of Pension Rollover Distributions


1. Purpose. To advise states of an amendment to Federal unemployment compensation (UC)
   law that prohibits the reduction of UC due to nontaxable pension rollover distributions.

2. References. Sections 3304(a)(15) of the Federal Unemployment Tax Act (FUTA); Public
   Law 109-280, the Pension Protection Act of 2006; Public Law 110-458, the Worker, Retiree,
   and Employer Recovery Act of 2008; Unemployment Insurance Program Letter (UIPL) 22-87
   and Changes 1 (60 Fed. Reg. 55,604 (1995)) and 2 (68 Fed. Reg. 15,241 (2003)); Internal
   Revenue Service (IRS) Publications 575 and 590; and IRS Tax Topic 413 - Rollovers from
   Retirement Plans.

3. Background. As a result of an amendment made by the Worker, Retiree, and Employer
   Recovery Act of 2008, states are now prohibited from reducing UC due to nontaxable
   pension rollover distributions. Whether to reduce UC due to receipt of taxable distributions
   remains a matter for the state to determine. This UIPL is issued to explain the amendment
   and its effect.

   Based on information available to the Department, only one state currently reduces UC due to
   any pension rollovers. However, all states should review their laws regarding treatment of
   rollovers to assure state law is consistent with the amendment.

4. Amendment to Federal Law. Section 3304(a)(15), FUTA, requires, as a condition of



Rescissions:                                     Expiration Date:
UIPL 22-87, Change 2                             Continuing

   employers in a state receiving credit against the Federal unemployment tax, that the state law
   provide that the amount of UC payable to an individual be reduced for any week which
   begins in a period with respect to which the individual is “receiving a governmental or other
   pension, retirement or retired pay, annuity, or any other similar periodic payment which is
   based on the previous work of such individual . . . .” This section goes on to provide certain
   exceptions to this requirement that are not relevant here.

   The Pension Protection Act of 2006 added new language to the end of Section 3304(a),
   FUTA, providing that UC “shall not be reduced under paragraph (15)” due to any retirement
   payment “not includible in gross income of the individual for the taxable year in which paid
   because it was part of a rollover distribution.” The Worker, Retiree, and Employer Recovery
   Act of 2008 deleted this language, redesignated existing provisions of Section 3304(a)(15),
   FUTA, and added the following new language:

              (B) the amount of compensation shall not be reduced on account of
              any payments of governmental or other pensions, retirement or retired
              pay, annuity, or other similar payments which are not includible in the
              gross income of the individual for the taxable year in which it was paid
              because it was part of a rollover distribution . . . .

5. Effect of Amendment. Prior to the 2006 amendment, states were free to determine whether
   rollover distributions would cause a reduction in UC. (See UIPL 22-87, Change 2, which this
   UIPL rescinds.) The effect of the 2006 amendment was ambiguous as it was unclear whether
   it prohibited the reduction of UC due to rollover distributions or merely clarified that FUTA
   did not require this reduction. The 2008 amendment is clear that states may not reduce UC
   due to payments “which are not includible in the gross income of the individual for the
   taxable year in which it was paid because it was part of a rollover distribution . . . .” In
   summary, as a result of the 2008 amendment, states are prohibited from reducing UC due to
   these nontaxable distributions; whether to reduce taxable distributions remains a matter for
   the state to determine.

   Whether a rollover distribution is “not includible in the gross income of the individual” for a
   taxable year is determined under IRS guidelines. In general, a distribution from an eligible
   retirement plan is not includible in gross income when the taxpayer “rolls over” the
   distribution to another eligible retirement plan within 60 days.

   Rollovers may occur in two ways. If the distribution is rolled over directly from one eligible
   retirement plan to another, the amount will not be includible in gross income, and FUTA
   therefore prohibits reduction of UC due to this rollover. If the distribution is paid directly to
   the individual, any amount of the requested distribution the individual pays into a qualified
   retirement plan within 60 days is not includible in gross income, meaning that a state may not
   reduce UC by that amount. Conversely, any amount distributed to the individual that the
   individual does not timely pay into another eligible retirement plan is includible in gross

   income; states may therefore elect to either reduce the individual’s UC by that amount or not.

   For further information on rollovers and their tax status, see IRS Tax Topic 413 - Rollovers
   from Retirement Plans and IRS Publications 575 and 590. These documents are available at
   www.irs.gov.

   As noted above, states remain free to determine whether to reduce UC due to a taxable
   distribution. If a state chooses to reduce UC due to taxable distributions, it must determine
   that a distribution is in fact taxable. Making this determination can be highly technical and
   time consuming, especially because the distribution’s tax status is controlled by the 60-day
   timeframe, with the result that the tax status of the distribution may not be known until well
   after the initial payment of UC has been made.

6. Effective Date. According to Section 112 of the Worker, Retiree, and Employer Recovery
   Act of 2008, the amendment “shall take effect as if included in the provisions of” the Pension
   Protection Act of 2006 “to which the amendments relate.” Because the Department
   recognizes that states that are not able to make the change through administrative
   interpretation may need time to introduce and enact conforming legislation to meet the
   requirements of P.L. 110-458, the Department will take no enforcement action prior to
   October 31, 2009.

7. Effect of Redesignation on Departmental Issuances. As noted above, the Worker, Retiree,
   and Employer Recovery Act of 2008 redesignated existing provisions of Section 3304(a)(15),
   FUTA. As a result, the Department’s previous issuances on this section no longer necessarily
   cite the correct paragraphs, clauses, and subclauses. The redesignation of these provisions
   does not affect the Department’s interpretation of the requirements of Federal law as
   contained in UIPL 22-87, its changes, or other departmental issuances, except that UIPL 22-
   87, Change 2, has been rescinded.

8. Action. State administrators should review existing state law provisions to assure
   consistency with Federal UC law requirements and take appropriate action to obtain any
   needed legislation.

9. Inquiries. Please direct any questions to your Regional Office.