Bills › 90th General Assembly
Excluding nonqualified deferred compensation income from the individual income tax, and including retroactive applicability provisions
Topics:TaxesIncome taxes
Same legislation: HF 2638
Where it is now
- Done: IntroducedJanuary 23, 2024
- Done: SubcommitteeJanuary 31, 2024
- Done: House committeeFebruary 28, 2024
- Skipped: Passes the HouseContinued as HF 2638
- Next: Senate committee
- Next: Passes the Senate
- Next: To the Governor
- Next: Signed into law
Became HF 2638 → Its progress continues under the new number. Go to HF 2638 What’s a funnel?
What’s in it
AI summary People who are disabled, elderly, or surviving spouses could stop paying state income tax on certain types of deferred compensation. This change allows these taxpayers to exclude money from nonqualified deferred compensation plans from their taxable income. The bill also makes sure that standard retirement plans, like 401(k)s, stay tax-free under these same rules.1
Read the official explanation
Under current law, a taxpayer may exclude retirement income from the computation of net income for purposes of the individual income tax. In order to be eligible for the retirement income exclusion, a person must be disabled, at least years of age, or be the surviving spouse of an individual or be a survivor having an insurable interest in an individual who would have qualified for the retirement income exclusion. This bill excludes nonqualified deferred compensation plan income from the computation of net income for purposes of the individual income tax under similar circumstances as the retirement income exclusion. In order to be eligible for the nonqualified deferred compensation plan income exclusion, the taxpayer must be disabled, at least years of age, or be the surviving spouse of an individual or be a survivor having an insurable interest in an individual who would have qualified for the income exclusion.7(19)(a) to ensure “qualified” deferred compensation plans remain excludable from the computation of net income for purposes of the individual income tax. A nonqualified deferred compensation plan is deferred compensation with no federal legal deferral limit that is subject to tax at a later date, and is usually made available to select employees. A qualified deferred compensation plan is subject to compensation deferral limits like 401(k) plans. The bill applies retroactively to January 1, 2024, for tax years beginning on or after that date.
House subcommittee
Named January 31, 2024. On February 6, 2024 it recommended passage. Vote Total: 3-0.
Three legislators hear a bill first and recommend what the committee should do; it’s the best time to weigh in. How to take part
Fiscal note
AI summary This bill excludes up to $500,000 from individual income tax for certain nonqualified deferred compensation plans for people who are disabled, age 55 or older, or surviving spouses. The bill would have a negative fiscal impact on the General Fund and local surtax because it reduces income tax liability. However, an estimate of the exact cost cannot be made due to a lack of information on these plans in Iowa.3
Read the fiscal note
Description
House File 2638 excludes up to $500,000 of a nonqualified deferred compensation plan or attributable earnings from the computation of net individual income tax for someone who is disabled, 55 years of age or older, or the surviving spouse of an individual or a survivor having an insurable interest in an individual who would have qualified for an income tax exemption. The Bill applies retroactively to tax years beginning on or after January 1, 2024.
Background
Beginning in tax year (TY) 2023, 2022 Iowa Acts, House File 2317 (Income Tax Rate Reduction and Exemptions Act) exempted all income defined as retirement income from the State individual income tax for disabled taxpayers and taxpayers aged 55 years or older. The exemption also applied to a deceased person’s retirement income that is received by a surviving spouse or a person with an insurable interest in the deceased person. House File 2317 did not alter the full retirement pay exemption available to retired military personnel, which is not based on age or disability. House File 2317 also excluded retirement income from the calculation of Iowa’s universal and age-based low-income full exemptions from individual income tax. According to the Internal Revenue Service, a nonqualified deferred compensation plan is an elective or nonelective plan, agreement, method, or arrangement between an employer and an employee to pay the employee compensation in the future. A qualified deferred compensation plan is subject to compensation deferral limits, similar to 401(k) and 457(b) plans, while a nonqualified deferred compensation plan is deferred compensation with no federal legal deferral limit that is subject to tax at a later date. 42 C.F.R. §413.99 defines qualified and nonqualified compensation plans for federal tax purposes. Nonqualified deferred compensation plans do not adhere to federal requirements specified in 26 U.S.C. §401(a). Nonqualified compensation plans may be used by individuals who already contribute the maximum to qualified compensation plans and represent another method for tax-free retirement contributions. Nonqualified compensation plans do not allow early distributions, loans, or rollovers (unlike qualified plans), and tax must be paid on distributions when made. Nonqualified compensation plans can have varying structures, compositions, and conditions for disbursements. The Iowa Department of Revenue (IDR) submitted a rulemaking to the Administrative Rules Review Committee in February 2024 that listed qualified retirement income for income tax exemptions. Nonqualified deferred compensation plans described in 26 U.S.C. §409A do not qualify for an income tax exemption under current Iowa law, per the IDR.
Assumptions
- Under the Bill, there are taxpayers in Iowa who will realize income tax benefits from their deferred compensation plans, although the IDR does not have an informed estimate of these fiscal impacts.
- The Bill will have a negative fiscal impact on the General Fund and local surtax due to the reduction in income tax liability.
Fiscal Impact
House File 2638 would have a negative fiscal impact on the General Fund, although an estimate cannot be made due to a lack of information on deferred compensation plans in Iowa.
Sources
- Internal Revenue Service
- Iowa Department of Revenue
- Legislative Services Agency
- Retirement Income Exemption, Deferred Compensation Plans · March 4, 2024
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90th General Assembly
Picked up later
Earlier and later bills are matched by wording or an identical title.
Similar bills
- HF 94 Relating to individual income taxation by exempting certain amounts received from nonquali…91st General Assembly · Renumbered as HF 961Very similar
Matched by wording or an identical title.