Some of you know far more about PA Income Tax than I--here is the real world hypothetical As a condition of employment a $50,000 a year employee is required as a condition of employment to contribute say 4% of salary to a qualified retirement plan and the deduction is made directly by employer ..of course the correct taxable salary for Federal purposes is $48,000. The employer also contributes to said plan, no tax questions as to that.

Yes I know 61 PaCode 101.6(c)8 says such contributions are included in pay in PA but that is inconsistent with PA's own revenue rulings! BOTH WAYS

  1. Rulings as to voluntary contributions 401k or 403b employee plans clearly focus on contributions being included IN income because employee had "constructive receipt of the funds" under federal concepts and state was obligated to follow the feds, therefore state must divert from Federal exclusion federal and include the payment as income .

  2. Ruling as to paying unused sick /vacation leave directly into a qualified plan (403b plan ), per a collective bargaining clause, in contradiction to literal read of 61 PaCode 101.6(c)8 says exactly the same thing that since the employee lacked constructive receipt of the funds the state was clearly required to follow the federal rule and exclude the payment as income. (Pit 05-020) Actually this PIT is very well laid out!

Clearly both rules are consistent as to constructive receipt! !

So both ways to issue the determining factor was "constructive receipt or lack of same" And in my hypothetical it is clear that employee lacks any element of constructive receipt and the plan is clearly a qualified plan and nothing is voluntary about the contribution ---

OK so why is the employee contribution added back to income in PA?

And the rather shallow response I got from PaDept Of Rev is it must be taxed on one side or other--which is not the question at all--and besides--the #2 example clearly and openly results in NO tax at either end!

So if PA is bound by own rules to follow constructive receipt doctrine--why is it taxable?

asked 24 Feb '10, 16:50

Remedy's gravatar image

accept rate: 5%

edited 24 Feb '10, 18:26

TaxQueries's gravatar image

TaxQueries ♦♦

VOLUNTARY is the key here I think Remedy. As a condition of employmnt, you stated this is required?
They still have constructive receipt of this though as it is in their own funds per termination, but I have no idea why this is a condition of is a benefit. I don't see how they can require the employee to pay into retirement plan.....they are losing monies by matching. I am confused

(24 Feb '10, 18:14) SandySea

Just don't fight it. PA does not allow ANY deduction for retirement as we don't tax it as long as it is normal (early distributions have separate rules). PSERS, etc is required, yet taxable to PA as they don't pay tax on a normal withdrawal.

And if you feel it is worth 3.07% (plus local) go ahead and fight. Personally, not worth the time or effort.

Helen, EA in PA


answered 25 Feb '10, 02:53

Helen%20EA%20in%20PA's gravatar image

Helen EA in PA
accept rate: 4%

Actually that is precisely what Pit 05 020 mandates be done! It is NOT to be included.

And it probably impacts several thousand employees

(25 Feb '10, 05:01) Remedy

October 14, 2005 Pennsylvania Personal Income Tax No. PIT-05-020 Contribution of Accumulated Sick Leave to a § 403 (b) Tax Sheltered Annuity ISSUE Is an amount that taxpayer pays to a tax-sheltered annuity, as described in § 403 (b) of the Internal Revenue Code, of a retiring employee at retirement which amount is based upon the accumulated, unused sick leave of the retiring employee, subject to Pennsylvania Personal Income Tax and employer withholding? CONCLUSION The amount is not subject to Pennsylvania Personal Income Tax or employer withholding.

(25 Feb '10, 05:03) Remedy
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Asked: 24 Feb '10, 16:50

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Last updated: 01 Jul '10, 07:22