When do disability-plan payments stop qualifying for Virginia's disability-income subtraction?

Plain-English summary

Virginia said qualifying disability payments stop being disability income for the subtraction when the recipient reaches mandatory retirement age. Before that age, payments from an employer-provided annuity, accident-and-health plan, or pension plan could qualify when included in gross income as wages or wage replacements for absence caused by permanent and total disability.

The Virginia subtraction was limited to $20,000 under the cited law. After mandatory retirement age, the same plan payments were treated as retirement income rather than disability wages and no longer qualified for that subtraction.

For a public retirement system, the ruling used age 65. For another qualified plan, mandatory retirement age meant the age when the employee would have been required to retire under the employer's program if the disability had not occurred. Virginia advised taxpayers approaching retirement age to check with their employers.

Common questions

Q: Does a Form 1099-R automatically make a payment retirement income?
A: The ruling focused on the payment's character and mandatory retirement age, not the form alone.

Q: What mandatory retirement age applies to a private employer plan?
A: The age the employee would have been required to retire under that employer's program absent disability.

Citations and references

• Va. Code §§ 58.1-219, 58.1-301, and 58.1-322(C)(4)(b).
• IRC §§ 22(c)(2)(B)(iii), 72, and 105(a).
• Treas. Reg. §§ 1.37-3(d)(1)(ii) and 7.105-1.

Subject

Taxable and nontaxable disability income

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-20

Original ruling text

March 5, 2012

Re: Request for Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling concerning the disability income subtraction permitted under Va. Code § 58.1-322 C 4 b. I apologize for the delay in responding to your request.

FACTS

Disability income eligible for the Virginia subtraction is paid to employees who are unable to work because of a permanent disability. Generally, such income is paid through a disability pension or annuity plans. Distributions from such plans are treated similar to those from pensions and retirement plans. The income is reported on the federal form for distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, and insurance contracts (Form 1099-R). You raise a question as to whether Virginia would consider income reported on Form 1099-R to be retirement income instead of disability income once an individual reaches retirement age.

RULING

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the Internal Revenue Code (IRC). See Va. Code § 58.1-219.

Under certain conditions, Va. Code § 58.1-322 C 4 b provides an individual income tax subtraction for up to $20,000 of disability income as defined under Internal Revenue Code (IRC) § 22(c)(2)(B)(iii). Under this section, "disability income" is defined as the total amount paid under an employer provided annuity (IRC § 72) or accident and health, or pension plan (IRC § 105(a)) that is included in an individual's gross income as wages or payments for time the employee is absent from work because of a permanent and total disability.

Under Treas. Reg. § 7.105-1, disability payments are generally considered to be wages or payments in lieu of wages made under provisions of a plan providing for such payments to an employee for a period during which the employee is absent from work on account of permanent and total disability. However, payments made to such an employee after reaching mandatory retirement age are not wages or payments in lieu of wages for purposes of the disability income exclusion. As such, once an individual reaches mandatory retirement age, payments from a plan that had previously constituted disability income would be considered to be retirement income and would not be eligible for the subtraction under Va. Code § 58.1-322 C 4 b.

For an individual receiving income from a public retirement system ( i.e. , a pension, annuity, or retirement, or similar fund or system established by the United States, a State, a possession of the United States, any political subdivision of any of the foregoing, or the District of Columbia), the mandatory retirement age is 65. See Treas. Reg. § 1.37-3(d)(1)(ii).

For individuals receiving income from any other qualified plans, the mandatory retirement age is the age at which the individual would have been required to retire under their employer's retirement program, had such individual not become disabled. See Treas. Reg. § 7.105-1. As such, taxpayers that have been receiving disability income and are close to retirement age should check with their employers in order to determine their mandatory retirement age.

The Code of Virginia section cited is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4711805370.E