PA Issues Tax Ruling on Employer Matching Contributions

December 10, 2004 ( - The Pennsylvania Department of Revenue has ruled that an employer's matching contributions to an employee's savings plan are exempt from the state's income tax in the year of contribution.

>According to an October 26 Letter Ruling (No. PIT-04-024), a contribution by an employer to a retirement plan is exempt from income tax under the Pennsylvania Consolidated Statutes Section 7301 (d)(ix) as an employer payment into a retirement program, as long as an employee does not have the discretion to take the contributions as cash salary or employer stock in that year.

>The Letter Ruling also stated that employer matching contributions in the form of cash to a 401(k) account are exempt from the state’s income tax in the contribution year.

>Pennsylvania Governor Edward Rendell recently made headlines by vetoing a bill that would have altered the tax status of nonqualified plan contributions (See Rendell Vetoes PA Non-Qual DC Tax Bill ). The bill would have taxed compensation from a nonqualified deferred compensation plan when it was received – not when it was deferred.

>Text of the October 26 Letter Ruling is available here .