Are 403(b) retirement distributions taxable in Kansas for K-12 school and university employees, and does moving a 403(b) to an IRA affect the exemption?

Plain-English summary

A taxpayer asked whether 403(b) retirement distributions are exempt from Kansas income tax for K-12 school employees and for university employees, and whether moving a 403(b) into a traditional IRA preserves any exemption.

The Department explained that Kansas income tax starts from your federal adjusted gross income, then applies specific additions or subtractions under K.S.A. 79-32,117. If no subtraction modification covers an item, whatever is taxable federally is taxable in Kansas.

Applying that framework:

• KPERS benefits (which cover most school district employees) have a subtraction modification and are exempt from Kansas income tax; rollovers of KPERS lump-sum distributions keep their exempt status.
• 403(b) accounts held by school district (K-12) employees have no subtraction modification, so those distributions are subject to Kansas income tax.
• A university employee's 403(b) held under the Kansas Board of Regents is exempt, but if it is moved to a private account not under the Board of Regents, those funds lose their exempt status.

The Department pointed to its Notice 07-05 for the KPERS rollover and retirement-account rules.

What this means for you

K-12 school employees

Your KPERS pension is exempt from Kansas income tax, but a separate 403(b) tax-sheltered annuity is not — distributions from a 403(b) are taxable in Kansas.

University and Board of Regents employees

A 403(b) held under the Board of Regents is exempt, but moving it into a private account outside the Board of Regents' auspices can strip that Kansas exemption. Check the treatment before you roll it over.

Tax preparers

The determinative question is whether a specific K.S.A. 79-32,117 subtraction applies. KPERS qualifies; an ordinary 403(b) held by a K-12 employee does not; a Regents 403(b) qualifies only while it stays under the Regents. See Notice 07-05.

Common questions

Q: Are 403(b) distributions taxed in Kansas?
A: For K-12 school district employees, yes — there is no Kansas subtraction for a 403(b). KPERS pension benefits, by contrast, are exempt.

Q: Is a university employee's 403(b) exempt?
A: Yes, while it is held under the Kansas Board of Regents. If it is moved to a private account outside the Board of Regents, it loses the exemption.

Q: Does rolling a 403(b) into a traditional IRA keep the exemption?
A: Moving a Regents 403(b) to a private account not under the Board of Regents causes the funds to lose their tax-exempt status. (KPERS lump-sum rollovers, separately, do keep their exempt status.)

Q: Does this ruling apply to me?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department reasons.

Citations and references

• K.S.A. 79-32,117 — Kansas income tax modifications (additions and subtractions from federal AGI)
• Kansas Notice 07-05 — KPERS rollovers and retirement-account tax treatment

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2016-010

Original ruling text

Private Letter Ruling

Body:

August 5, 2016

XXXXXXXXXX
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XXXXXXXXXX

Re: Kansas Income Tax

Dear XXXXX

Your correspondence of July 21, 2016, has been referred to me for response. Thank you for your inquiry.

By your e-mail you have requested our advice regarding Kansas income tax. Specifically, your e-mail states:

Are 403(b)'s for k-12 employees excluded from state taxes when they take income? What about university employees?

Can you move a 403(b) into a Traditional IRA and still get the state tax exemption?

As you may be aware, Kansas law requires the use of federal adjusted gross income as the starting point for computing the Kansas income tax. Then certain modifications, either additions or subtractions, may be required in accordance with K.S.A. 79-32,117. In the absence of a specific modification under K.S.A. 79-32,117 those items which are subject to federal tax will be subject to Kansas tax and those items which are exempt from federal tax will be exempt from Kansas tax.

K.S.A. 79-32,117 provides a subtraction modification for benefits paid under KPERS, which covers most school district employees. In addition, rollovers of lump-sum distributions from KPERS retain their tax exempt status. [See our Notice 07-05.] However, there is no subtraction modification for 403(b) accounts held by school district employees. And, if a 403(b) account held by a university employee under the auspices of the Board of Regents is moved to a private account not under the auspices of the Board of Regents those funds loss their tax exempt status. [Again, see our Notice 07-05.]

Please note you can access Notice 07-05 through our web site at:
http://rvpolicy.kdor.ks.gov/Pilots/Ntrntpil/IPILv1x0.NSF/ae2ee39f7748055f8625655b004e9335/0a792dd6fa7e4ceb862573280061471b?OpenDocument

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

JW:jw

NOTE: This opinion letter is based solely on the facts provided in your request for advice. If material facts or information were not disclosed this letter is null and void. This letter will be revoked without further action by the Department if the statutes, administrative regulations, published revenue rulings, or court decisions that materially affect this opinion are changed.

Date Composed: 09/16/2016 Date Modified: 09/16/2016

Table 1

| Ruling Number: | P-2016-010 |

Table 2

| Tax Type: | Individual Income Tax |
| Brief Description: | Taxation of 403(b) Accounts Held by Public School and University Employees |
| Keywords: | |
| Effective Date: | 08/05/2016 |
| Approval Date: | 08/05/2016 |