Were special Hurricane Katrina distributions from Louisiana public-system Deferred Retirement Option Plan accounts taxable by Louisiana?

Plain-English summary

Qualifying Hurricane Katrina distributions from covered Deferred Retirement Option Plan accounts remained exempt from Louisiana income tax.

Acts 50 and 61 of the 2005 First Extraordinary Session allowed certain public-retirement-system participants who had not left service to withdraw DROP funds for Katrina losses.

Those distributions were included in federal adjusted gross income—generally ratably over the distribution year and the next two years unless the participant elected otherwise—but La. R.S. 11:405 separately exempted covered benefits from state and municipal tax.

Why federal inclusion did not control Louisiana tax

The emergency legislation's federal-income language could suggest taxability. The ruling resolved that tension by applying the existing Louisiana exemption for an annuity, retirement allowance, refund of contributions, optional benefit, or other benefit paid under the covered chapter.

Thus, federal adjusted gross income included the distribution, but Louisiana income tax did not.

Common questions

Q: Were the Katrina DROP withdrawals included federally?

A: Yes, under the treatment described in the ruling.

Q: Did that make them taxable in Louisiana?

A: No. La. R.S. 11:405 preserved the state exemption.

Q: Who could use this treatment?

A: The ruling addressed qualifying distributions authorized by Acts 50 and 61 for participants in the covered public retirement systems.

Q: Does this decide ordinary early DROP distributions?

A: No. The ruling specifically concerns Hurricane Katrina relief enacted in the 2005 First Extraordinary Session.

Citations and references

• La. R.S. 11:405 — state and municipal tax exemption for covered public-retirement benefits
• La. R.S. 11:292 — statutory exception referenced in § 11:405
• Acts 50 and 61 of the 2005 First Extraordinary Session
• Katrina Emergency Tax Relief Act of 2005 — federal income-spreading treatment referenced in the ruling
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-005

Original ruling text

Revenue Ruling
No. 06-005
May 10, 2006
Individual Income Tax
Implications of Acts 50 and 61 of the 2005 1st Extraordinary Session on the Tax
Exempt Status of Early Distributions from Deferred Retirement Option Plans Due
to Hurricane Katrina
Acts 50 and 61 of the 2005 1st Extraordinary Session concerning Deferred Retirement
Option Plans (DROP) of public retirement systems in the state were enacted to allow
certain participants who have not withdrawn from service to withdraw money from their
plan accounts to help cover losses due to Hurricane Katrina. Both Acts 50 and 61
provided that “if…an individual receives a qualified Hurricane Katrina distribution the
amount of the distribution shall be included in income by the retirement system, generally
ratable over the year of the distribution and the following two years in accordance with
the Katrina Emergency Tax Relief Act of 2005 …unless the individual elects in writing
not to have the ratable distribution apply for any taxable year.”
The above language could be construed to mean that because the qualified Hurricane
Katrina distributions are included in income, that income is taxable. However, Section
11:405 of the Louisiana Revised Statutes provides for a state tax exemption for benefits
paid under the provisions of Chapter 1, Title 11.
§ 405 Exemption from execution; exception. Any annuity, retirement
allowance or benefit, or refund of contributions, or any optional benefit or
any other benefit paid or paid to any person under the provisions of this
Chapter is exempt from any state or municipal tax and is exempt from
levy and sale, garnishment, attachment, or any other process whatsoever,
except as provided in R.S. 11:292, and is unassignable.
Thus, despite the fact that the qualified Hurricane Katrina DROP distributions are
includable in federal adjusted gross income, they remain tax exempt for Louisiana
income tax purposes.
A Revenue Ruling is issued under the authority of LAC 61.III.101 (C). A Revenue Ruling is written to
provide guidance to the public and to Department of Revenue employees. It is a written statement issued to
apply principles of law to a specific set of facts. A Revenue Ruling does not have the force and effect of
law and is not binding on the public. It is a statement of the department's position and is binding on the
department until superseded or modified by a subsequent change in statute, regulation, declaratory ruling,
or court decision.