I receive retirement benefits from a Missouri public university's pension plan -- do they qualify as a 'non-privately-funded' retirement subtraction on my Missouri return, even though I also contributed to the plan myself?

Plain-English summary

The Missouri Department of Revenue ruled on whether retirement benefits paid by a public Missouri university (Applicant) from two of its retirement plans qualify for the Missouri income tax subtraction available to "retirement benefits received from sources other than privately funded sources" under Section 143.124.5, RSMo.

Applicant pays benefits from two plans: a "Retirement, Disability, and Death Benefit Plan" (a federally qualified, IRS-categorized "governmental" hybrid plan combining defined-benefit and defined-contribution features) and a "Supplemental Retirement Plan" (a federally qualified governmental defined-contribution plan). Both plans are funded by both employer and employee contributions, and Applicant's employer contributions ultimately come from public revenue sources such as federal and state appropriations, tuition, fees, grants, contracts, and gifts.

For the Retirement, Disability, and Death Benefit Plan, the Department ruled that benefits qualify entirely as "from sources other than privately funded sources." Even though employees contribute to the plan, IRC Section 414(d) defines a "governmental plan" as one established and maintained by a state or its instrumentality, and because Applicant (a state-created entity) established, maintains, and pays out the plan, none of the plan's benefits count as "privately funded." This plan also does not accept rollovers from private sources, which reinforced the result.

For the Supplemental Retirement Plan, the Department reached the same general conclusion -- but with one exception. Because that plan permits rollovers and transfers in from private retirement sources such as IRAs, any portion of a benefit payment attributable to funds that were rolled over or transferred in from a private source keeps its character as "privately funded," even after being moved into the governmental plan. That portion is instead governed by the separate subtraction rules for privately funded retirement allowances under Section 143.124.3, RSMo. The ruling points to the Department's own prior Letter Ruling 8197 (June 17, 2022) for more detail on how to treat rolled-over private funds inside a governmental plan.

What this means for you

For retirees of public-sector governmental plans

If you receive retirement benefits from a plan established and maintained by a Missouri public university, state agency, or similar governmental employer, those benefits generally qualify as "from sources other than privately funded sources" under Section 143.124.5, RSMo -- even if you personally contributed to the plan during your career. The key factor is who established and maintains the plan (a governmental entity) and who pays the benefits, not whether employees also put money in.

For retirees who rolled private funds into a governmental plan

If your governmental retirement plan ever accepted a rollover or transfer from a private retirement source -- such as an IRA or a private-employer plan -- the portion of your benefit payments attributable to that rolled-over money does not get the Section 143.124.5, RSMo, treatment. Instead, that portion is treated as "privately funded" and falls under the different subtraction rules in Section 143.124.3, RSMo. You may need to track or ask your plan administrator how much of your benefit is attributable to the rollover versus the governmental-plan sources.

For plan administrators tracking rollover sources

If you administer a governmental plan that accepts rollovers or transfers from private sources, this ruling underscores the importance of tracking which portion of participant account balances (and resulting benefit payments) is attributable to private rollover funds versus employer/employee contributions from public revenue sources. That tracking determines which of the two different subtraction provisions -- Section 143.124.3 or Section 143.124.5, RSMo -- applies to a given payment, which affects how participants report the income on their Missouri returns.

Common questions

Q: Does the fact that I contributed my own money to my public university's pension plan disqualify my benefits from the "non-privately-funded" subtraction?
A: No. Under this ruling, a plan can still be a "governmental plan" -- and its benefits still "from sources other than privately funded sources" -- even if it's funded partly by employee contributions. What matters under IRC Section 414(d) is that a state or its instrumentality (here, a public university created by Missouri law) established and maintains the plan and is the one paying the benefits.

Q: I rolled my old IRA into my public university's supplemental retirement plan. Does that change how my eventual benefits are taxed?
A: Yes, potentially. The portion of your benefit payments attributable to the rolled-over IRA funds keeps its character as "privately funded" even after being rolled into the governmental plan. That portion is subject to the subtraction rules under Section 143.124.3, RSMo, for privately funded retirement allowances, rather than the Section 143.124.5, RSMo, rules for non-privately-funded benefits.

Q: Why did the two plans in this ruling get treated the same way for the "governmental plan" question but differently regarding rollovers?
A: Both plans were established and maintained by the same state-created public university and funded from the same public revenue sources, so both qualified as "governmental plans" generally exempt from privately-funded treatment. The difference is that the Retirement, Disability, and Death Benefit Plan does not accept rollovers from private sources, while the Supplemental Retirement Plan does -- so only the Supplemental Retirement Plan has a carve-out for the private-source portion of its payments.

Q: Where can I find more detail on how to calculate the private-source portion of a payment from a governmental plan that accepted a rollover?
A: This ruling points to the Department's earlier Letter Ruling 8197 (June 17, 2022), which addresses in more detail how to treat funds transferred or rolled over from a private retirement source once they are inside a governmental plan.

Citations and references

Statutes and cases:

• Section 143.124.5, RSMo (subtraction for retirement benefits received from sources other than privately funded sources, for tax years beginning on or after January 1, 2012)
• Section 143.124.3, RSMo (subtraction for retirement allowances received from privately funded sources, for tax years beginning on or after January 1, 2002)
• IRC Section 414(d) (federal definition of a "governmental plan" as one established and maintained by a state, its political subdivision, or an agency or instrumentality of either)
• Missouri Dept. of Revenue Letter Ruling 8197 (June 17, 2022) (discussed in this ruling as prior guidance on treating funds rolled over from a private source into a governmental plan)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8273

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated September 21, 2023.

The facts as presented in your letter ruling request and your subsequent answers to the Department of Revenue's follow-up questions are summarized as follows:

Applicant is a public university that was created by the laws of the State of Missouri. It pays benefits from two plans relevant to this letter ruling: Applicant's Retirement, Disability, and Death Benefit Plan and Applicant's Supplemental Retirement Plan.

For the Retirement, Disability, and Death Benefit Plan:

1. The plan is a federally qualified pension plan.

2. The plan is categorized as a "government" plan by the Internal Revenue Service.

3. The plan is considered a "hybrid" plan as it contains characteristics of both a defined benefit plan and a defined contribution plan.

4. The plan is funded from employer contributions by Applicant.

5. There are employee contributions to the plan.

6. Applicant is a public university that was created by the laws of the State of Missouri.

7. Sources of revenue for Applicant's contributions to the plan include federal appropriations, State of Missouri appropriations, tuition, fees, grants, contracts, and gifts. All such resources of revenue are represented in the form of employer contributions to the Plan.

8. Participants in the plan cannot rollover or transfer amounts from private sources into the plan.

For the Supplemental Retirement Plan:

1. The plan is a federally qualified pension plan.

2. The plan is categorized as a "government" plan by the Internal Revenue Service.

3. The plan is considered a defined contribution plan.

4. The plan is funded from both employer and employee contributions.

5. Applicant is a public university that was created by the laws of the State of Missouri.

6. Sources of revenue for Applicant's contributions to the plan include federal appropriations, State of Missouri appropriations, tuition, fees, grants, contracts, and gifts. All such sources of revenue are represented in the form of employer contributions to the Plan.

7. Rollovers or transfers from private retirement sources to the plan are allowed under the terms of the plan.

ISSUE 1 :

Do benefits paid from Applicant's Retirement, Disability, and Death Benefit Plan qualify under Section 143.124.5, RSMo, as "retirement benefits received from sources other than privately funded sources"?

RESPONSE 1 :

Yes. Benefits paid from Applicant's Retirement, Disability, and Death Benefit Plan are "retirement benefits received from sources other than privately funded sources," for purposes of Section 143.124.5, RSMo.

Section 143.124, RSMo, prescribes when certain retirement benefits or allowances may be subtracted from an individual income taxpayer's Missouri adjusted gross income. This statute identifies retirement benefits or allowances as either "from any privately funded sources" or "from sources other than privately funded sources." Subsection 3 of Section 143.124 describes the circumstances under which a taxpayer may subtract "any retirement allowance received from any privately funded sources," for tax years beginning on or after January 1, 2002, and subsection 5 describes the circumstances under which "retirement benefits received from sources other than privately funded sources" may be subtracted for tax years beginning on or after January 1, 2012.

Applicant is an entity created by the State of Missouri pursuant to state law. Applicant's Retirement, Disability, and Death Benefit Plan is a "governmental plan" under federal law. IRC Section 414(d) defines this term and reads, in part, as follows:

For purposes of this part, the term "governmental plan" means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.

Although Applicant's Retirement, Disability, and Death Benefit Plan is funded, in part, by employee contributions, Applicant established and maintains the plan and Applicant is the payor of the benefits. Benefits paid by this plan are not from privately funded sources, but are from sources other than privately funded sources, for purposes of Section 143.124.5, RSMo.

ISSUE 2 :

Do benefits paid from Applicant's Supplemental Retirement Plan qualify under Section 143.124.5, RSMo, as "retirement benefits received from sources other than privately funded sources"?

RESPONSE 2 :

Yes. Benefits paid from Applicant's Supplemental Retirement Plan are "retirement benefits received from sources other than privately funded sources," for purposes of Section 143.124.5, RSMo. This is with the exception of the portion of any retirement benefits paid under Applicant's Supplemental Retirement Plan that is attributable to funds transferred or rolled over from privately funded retirement sources, such as IRAs. See Mo. Dept. of Rev. Letter Ruling 8197 (June 17, 2022).

The analysis of these payments is much the same as the analysis in Response 1. Applicant is an entity created by the State of Missouri pursuant to state law, and its Supplemental Retirement Plan is a "governmental plan" under federal law. Although Applicant's Supplemental Retirement Plan is funded, in part, by employee contributions, Applicant established and maintains the plan and Applicant is the payor of the benefits. Benefits paid by this plan are generally not from privately funded sources, but are from sources other than privately funded sources, for purposes of Section 143.124.5, RSMo.

However, the Supplement Retirement Plan is able to accept transfers and rollovers from private retirement sources. Despite being rolled over or transferred into the Plan, these funds do not lose their character as a private source of retirement benefits. The portion of a payment from the Supplemental Retirement Plan to a participant is "from any privately funded sources" to the extent the payment amount is attributable to funds from the private retirement source. Please see Letter Ruling 8197 for more information on the treatment of transfers or rollovers from a private source of retirement funding to a governmental plan.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. This letter ruling is not binding upon the Department of Revenue with respect to any other taxpayers, including, but not limited to, Applicant's current or former employees. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel, Vickie Adiele, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford