Ohio Supreme Court: Supplemental Executive Retirement Plan Exempt from City Tax– October 07, 2015 by Karen Raghanti

Pension and IRA distributions are exempt from Ohio city income taxes, but what about supplemental executive retirement plan (SERP) distributions? Does a SERP qualify as a pension distribution and exempt city tax treatment as well? Yes, according to the August 19, 2015, decision handed down by the Ohio Supreme Court in MacDonald v. City of Shaker Heights Tax Board of Review.

For tax purposes, SERP is an “unqualified deferred compensation plan.” However, in this case, Mr. MacDonald elected to take the distribution as a periodic payment. The annuity SERP present value of future annuity payments in the amount of $9,107,014 was reported on Form W-2 in box 5 “Medicare wages” but not in box 18 for “Shaker Heights city wages.” Mr. MacDonald intended the payments to replace his income after he retired.

The city and the Municipal Tax Board held that the SERP payments were taxable for city tax. However, the Ohio BTA reversed the decision, and the Tenth District and ultimately the Ohio Supreme Court agreed. The Ohio BTA stated that in their decision that “a pension is any plan sponsored by an employer that provides for post-retirement income that’s designed to supplement income for life.” The SERP was paid out overtime and did not represent a deferred salary, but, instead, was intended to replace a percentage of income once the taxpayer was no longer working.

If you are a resident of an Ohio taxing municipality and have received retirement payments from a non-traditional pension or profit sharing plan, have a conversation with your tax advisors to determine if this case creates an opportunity for your situation as well.

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