Keystone State DOR Withdraws NQDC Ruling

January 24, 2005 ( - The Pennsylvania Department of Revenue has pulled back its 2004 policy notice regarding the state income tax status of income deferred under a nonqualified deferred compensation (NQDC) plan.

>The department’s move to withdraw Personal Income Tax Policy No. 112 comes as Keystone State Governor Edward Rendell has proposed legislation aimed at overturning a 2004 Commonwealth Court decision – Ignatz v. Pennsylvania, 849 A.2d 308 (Pa. Commw. Ct. 2004) – with the bill asserting that NQDC income is taxable when earned and not when it is deferred.

>According to Revenue Department spokesman Steve Kniley, the department has suspended enforcement of employer withholding on nonqualified deferred compensation when earned. However, because the Ignatz ruling still applies, the department has no authority to issue refunds so money paid under Ignatz cannot be refunded until the law has been amended, Kniley said.

>Rendell rejected a state house measure in December (See  Rendell Vetoes PA Non-Qual DC Tax Bill) which would have taxed deferred compensation when it was received, despite claims by business lobbyists that the move would have brought the Keystone State in line with the tax policy of the federal government and every other state.