457 disbursements- post 59.5 in PA

[FargoI]

Good evening.

Situation:
In PA, my understanding is all deferred retirement plans are taxable when the income is earned (i.e. 401, 403, 457b plans). Upon disbursements of monies held within a 457b plan, in PA, the payments are reported on a W2. It appears this results in double taxation on the contributions.

Background:
I reside in PA and related employment was in PA. Over a period of several years I contributed to a non-qualified 457b plan. Reviewing corresponding prior year's annual w2's I beleive State and Local taxes WERE withheld and taxes were subsequently each year in conjunction with filing state/local taxes).

In 2021 at age 64, I started to take quarterly 457 b distributions with a five year depletion horizon. Having completed and filed my 2021 taxes via H&R Block I am now having second thoughts regarding the potential for the 457b funds to have been subjected to double taxation (at time of contribution and at time of disbursement). I could understand Net gain being taxed...


Assessment:
Using H&R Block for Fed and State- there did not appear to be a way (in 2022) to report the 2021 457 related payments in a fashion that would avoid double taxation. The 457 payments being reported on a W2, with the Federal and State boxes populated, being a key factor.

The holder of the 457b account (Great West) has been unable/unwilling to provide guidance in this matter. I am unable to get a hold of anyone in the Commonwealth of PA and the Local taxing authority was unable to provide any insights.


If you are familiar with PA's handling of 457B non qualified contributions and subsequent disbursements - I would greatly appreciate your insights. Thank you in advance.

Thanks in advance.

 

[Dash man]

Good evening.

Situation:
In PA, my understanding is all deferred retirement plans are taxable when the income is earned (i.e. 401, 403, 457b plans). Upon disbursements of monies held within a 457b plan, in PA, the payments are reported on a W2. It appears this results in double taxation on the contributions.

Background:
I reside in PA and related employment was in PA. Over a period of several years I contributed to a non-qualified 457b plan. Reviewing corresponding prior year's annual w2's I beleive State and Local taxes WERE withheld and taxes were subsequently each year in conjunction with filing state/local taxes).

In 2021 at age 64, I started to take quarterly 457 b distributions with a five year depletion horizon. Having completed and filed my 2021 taxes via H&R Block I am now having second thoughts regarding the potential for the 457b funds to have been subjected to double taxation (at time of contribution and at time of disbursement). I could understand Net gain being taxed...


Assessment:
Using H&R Block for Fed and State- there did not appear to be a way (in 2022) to report the 2021 457 related payments in a fashion that would avoid double taxation. The 457 payments being reported on a W2, with the Federal and State boxes populated, being a key factor.

The holder of the 457b account (Great West) has been unable/unwilling to provide guidance in this matter. I am unable to get a hold of anyone in the Commonwealth of PA and the Local taxing authority was unable to provide any insights.


If you are familiar with PA's handling of 457B non qualified contributions and subsequent disbursements - I would greatly appreciate your insights. Thank you in advance.

Thanks in advance.

I suggest you contact the HR department of your employer. They are ultimately responsible for determining the portion of the distribution that is taxable (the gains) before completing the W-2.

Here is something I found on an Internet search: https://www.revenue.pa.gov/TaxLawPo...letins/PIT/Documents/pit_bulletin_2005-04.pdf

 

[FargoI]

Dash man. Thank you for your reply and the citation..

I spent an hour on the phone with a rep from the PA Dept of Revenue and while she agreed that it appears the issued 457b W2 is causing me to be subjected to double taxation, she was unable to recommend a solution from the prospective of submitting an amended PA40..

The fiduciary carrier ( Great West) indicates the question is valid, however they only print and distribute the 457b relatred W2 with information provided by my former employer (consequently, HR/PR must provide explanation).

Earlier today I requested in writing that my former employer provide detailed explanations of how they treat deferred compensation for F, S and L taxes at time of earning as well as at time of distribution.

I also spoke with a local H&R Block tax preparer who coincidentally has a family member who worked for the same entity and who is currently receiving 457b distributions. Her initial impression is the w2 provided by Great West is incorrect as the distribution was previously taxed. I have an in-person appointment in ~ week.

What's crystal clear to me is the handling of 457b deferrals in PA is potentially problematic. As such, anyone in a similar situation as me (in this group) would be well advised to critically assess participation, as well as, annual W2s while employed and W2s generated throughout distribution periods. Thanks again Dash man.

 

[Dash man]

Sounds like you’ll ultimately need a corrected W-2. Consider filing an extension with the state if this isn’t resolved next week.

 

[FargoI]

The good news, from a conservative standpoint, when I submitted my State and Local taxes last week, my entries accurate reflected the 457b W2. Worse case I will need to submit an amended return if HR/PR concur there was an error on their behalf. If HR does not concur, next step is for H&R block to determine if there is another approach. I'll post an update after I hear from HR/PR. Still interested in hearing if anyone else in this community encountered similar concerns.

 

[Philliefan33]

PA is going to tax the income from a non-qualified plan reported on a W-2. If you live in a township with a local earned income tax, you will also owe that.

It sounds like the error was made in the year(s) the 457b deferrals occurred. Those contributions should not have been taxed at the time. If they were taxed initially, I have no idea how to unwind that. It almost sounds like a class-action suit against the employer.

 

[FargoI]

From my assessment, PA handles deferred compensation differently from Fed and many other states...intentionally taxing the income at time of earnings. This leads me to believe the 457 W2 should not have reported state income. Interesting, the 457b W2 did NOTreport local income. Anxiously awaiting HR/PR explanation. Also hopeful others in this community will have expert knowledge in this arena.

Thanks again for your reply

 

[RE2Boys]

See page 12 of the PA40 instructions
https://www.revenue.pa.gov/Formsand...dividuals/PIT/Documents/2021/2021_pa-40in.pdf

You are to include the PA-40 W2 RW to reconcile the W2 with what is taxable to PA.

Per PA PIT Bulletin 2005-4, the cost recovery rule applies to any diferred income such as nonn-qualified plans, early distribution of retirement plans, and 529 plans.

Essentially, any distribution from the deferred plan is deemed to be a return of your contributions first and is not taxable until you have received your already taxed contributions (basis). Thus your basis is the sum of all your contributions into the plan less the sum of all previous distributions from the plan.

I have no idea if or how well any commercial tax software supports this form and have not personally ever used the form. At my VITA site, I have two returns on hold waiting for clients to provide their "basis" in there retirement plans due to early distributions.