Are payments from the Kansas Board of Regents Retirement Plan subject to Kansas income tax, and how is the exemption claimed?

Plain-English summary

The Regents Retirement Plan is a 403(b) defined-contribution (money-purchase) plan into which Regents faculty and unclassified employees contribute part of their pay on a tax-deferred basis under K.S.A. 74-4925. Payments are generally taxable federally and included in federal adjusted gross income (AGI), so a Kansas exemption is taken as a subtraction modification under K.S.A. 79-32,117(c)(ii).

All Plan benefits are exempt from Kansas income tax under K.S.A. 74-4923(b). To qualify, a payment must be (1) received directly from a Board-authorized company -- TIAA-CREF, Aetna Life Insurance and Annuity, Lincoln National Pension, or Security Benefit Life -- and (2) included in federal AGI in the year received.

• Direct one-time payments (withdrawal of accumulated contributions, or a lump sum at retirement) and monthly payments are exempt; subtract them on the Kansas return.
• Transfers between authorized providers, or into a later employer's 403(b) plan, are not included in federal AGI, so no Kansas modification is made.
• Rollovers: once Plan funds are rolled into a qualified account (such as an IRA), they lose their character as Plan payments and are no longer paid directly by an authorized company. Payments later made from that rollover account are not exempt from Kansas income tax, so no subtraction modification is made for them.

What this means for you

If you are a Regents Plan participant receiving money directly from TIAA-CREF or another authorized company, and it is in your federal AGI, subtract it on your Kansas return so Kansas does not tax it. Be careful with rollovers: unlike the revised KPERS notice, this Regents notice says payments out of a rollover account are taxable in Kansas, because the money is no longer paid directly by the Plan's authorized companies. Keep records of how and from whom each payment is received.

Common questions

Q: Is my Regents Retirement Plan benefit taxed by Kansas?
A: No, if it is paid directly by a Board-authorized company and is in your federal AGI. It is exempt under K.S.A. 74-4923(b) and claimed as a subtraction modification.

Q: Which companies count as paying 'directly' from the Plan?
A: TIAA-CREF, Aetna Life Insurance and Annuity Company, Lincoln National Pension Company, and Security Benefit Life Insurance Company -- the providers the Board authorized.

Q: Are transfers between providers taxable?
A: No. Transfers between authorized providers (or into a later employer's 403(b) plan) are not in federal AGI, so no Kansas modification is made and there is nothing to tax.

Q: What about payments from an account I rolled Plan money into?
A: Those are not exempt. Once the funds are rolled into a qualified account they lose their Plan character and are no longer paid directly by an authorized company, so payments from that account are taxable in Kansas.

Citations and references

• K.S.A. 74-4925 -- Regents Retirement Plan contributions (403(b) plan).
• K.S.A. 74-4923(b) -- Plan benefits exempt from any Kansas tax.
• K.S.A. 79-32,117(c)(ii) -- subtraction for amounts in federal AGI that Kansas specifically exempts.
• Internal Revenue Code Section 403(b) (federal salary-reduction basis for Plan contributions), referenced in the notice.

Subject

Kansas Income Tax Treatment of Regents Retirement Plan Payments

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 05-05

Original ruling text

Notice
Notice Number: 05-05
Tax Type: Individual Income Tax
Brief Description: Kansas Income Tax Treatment of Certain Payments Received from the Regents
Retirement Plan.
Keywords:
Approval Date: 06/02/2005

Body:
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.

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) defined-contribution retirement plan, the transferability rules of the subsequent employer’s plan

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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; . . . . .

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

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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.

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) defined-contribution 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 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

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                                           Phone: 785-368-8222

Fax: 785-291-3614

Date Composed: 06/02/2005 Date Modified: 06/02/2005

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