Hawaii Administrative Rules › Title 18 - DEPARTMENT OF TAXATION › Chapter 235 - INCOME TAX LAW › Subchapter 1 - GENERAL PROVISIONS › Section 18-235-7-03 - Exclusion of pension income

Current through June, 2024
(a) The rules in
				this section shall be coordinated with provisions of the IRC. The IRC is
				operative in chapter
				235, HRS, pursuant to sections
				235-2.3,
				235-2.4,
				HRS, and other HRS provisions. To determine the taxability for state purposes
				of a distribution from a pension, profit sharing, or similar plan, the taxpayer
				must first determine the federal income tax treatment for a distribution from
				such plan. If a distribution from such plan is not subject to federal income
				taxation, the distribution is similarly exempt from state income taxation under
				section
				235-2.3
				or
				235-2.4,
				HRS. If, however, the distribution is partially or totally subject to income
				taxation under section
				235-2.3
				or
				235-2.4,
				HRS, the taxpayer may turn to section
				235-7(a)(3),
				HRS, and this section to determine whether the taxpayer is able to claim a
				total or partial exemption for such taxable portion of the distribution, as the
				case may be. In determining whether the taxpayer is eligible to claim an
				exemption for a distribution under section
				235-7(a)(3),
				HRS, and this section, section
				235-7(a)(3)
				does not adopt the provisions in Subchapter D of the IRC (sections 401 through
				424, IRC) which redefine certain amounts as employer contributions, and
				artificially redefine self-employed persons as employees, for purposes of those
				IRC sections. If the distribution is subject to income taxation in whole or in
				part under section
				235-7(a)(3),
				HRS, and this section, the taxpayer shall include the taxable amount of such
				distribution in determining the taxpayer's gross income, adjusted gross income,
				and taxable income.
(b) Section
				235-7(a)(3),
				HRS, excludes from gross income, adjusted gross income, and taxable income, any
				compensation received in the form of a pension for past services.
(c) As used in this section:
"By reason of retirement, disability, or death" describes
				  benefits paid because of retirement, including attainment of age 70-1/2 (to
				  comply with section 401(a)(9)(C), IRC, with respect to required beginning
				  date); disability as defined in section 72(m)(7) (with respect to meaning of
				  "disabled"), IRC; or death. A benefit payment is not made by reason of
				  retirement, disability, or death if it is actually or constructively received
				  prior to retirement, disability, or death, even though the benefit payment is
				  the same as the amount of benefits which would have been enjoyed upon
				  retirement. A payment made by reason of retirement, disability, or death does
				  not include:
(1) An amount paid because of separation from service before
				  retirement;
(2) An employer contribution to a non-qualified pension plan
				  that is deemed to be received by the employee upon vesting before retirement
				  under Treas. Reg. §1.402(b)-1(b) (with respect to taxability of employee
				  when rights under nonexempt trust change from nonvested to vested); or
(3) An early distribution subject to federal penalty tax
				  under section 72(t) (with respect to 10 percent additional tax on early
				  distributions from qualified retirement plans), IRC.
"Employer contribution" means the aggregate amount of
				  contributions that are either made by the employer, or made for the employer by
				  members of a group of affiliated corporations as provided by section
				  404(a)(3)(B) (with respect to profit sharing plan of affiliated group), IRC.
				  These amounts are included in the employer contribution even though section
				  72(f) (with respect to special rules for computing employees' contributions) or
				  101(b) (with respect to employees' death benefits), IRC, may provide that the
				  amounts are considered employee contributions for some purposes. The employer
				  contribution does not include any amounts included in pretax employee
				  contribution or previously taxed contribution. Employer contribution does not
				  include any amounts contributed by a plan beneficiary under an elective right,
				  provided that an amount otherwise qualifiying as an employer contribution shall
				  not be disqualified as to a particular beneficiary solely because (1) the
				  beneficiary determined the contribution amount in his or her capacity as an
				  officer, partner, member, or sole proprietor, or (2) the beneficiary is allowed
				  or is allocated all or a portion of the deduction allowable under section 162
				  or 404, IRC, attributable to the contribution.
"Exclusion ratio" means the ratio described in subsection
				  (e)(1).
"Pension." A pension:
(1) Provides an employee with compensation for past services,
				  generally measured by such factors as years of employees' service and
				  compensation received;
(2) May be in the form of a (A) periodic or systematic
				  payment of benefits to the employee over a period of years (e.g., usually for
				  life after retirement), or (B) lump sum in lieu of periodic or systematic
				  payments;
(3) Is to be received by the employee by reason of
				  retirement, disability, or death;
(4) Is attributable to employer contribution;
(5) Includes a stock bonus, pension, profit sharing, or
				  annuity plan, as those terms are defined in sections 401 (with respect to
				  qualified pension, profit sharing, and stock bonus plans) and 403 (with respect
				  to taxation of employee annuities), IRC;
(6) Need not be qualified within the meaning of section 401,
				  IRC; and
(7) May be paid to the employee, the employee's spouse upon
				  retirement or disability, or a deceased employee's beneficiary.
"Pretax employee contribution" means the aggregate amount of
				  voluntary contributions made by the employee under any elective right, such as
				  contributions to:
(1) individual retirement accounts to which an employer does
				  not contribute (see subsection (d)(2) for rollover individual retirement
				  accounts),
(2) IRC section 401(k) plans (with respect to cash or
				  deferred arrangements);
(3) IRC section 408(k)(6) plans (with respect to elective
				  salary reduction contributions to simplified employee pension arrangements), or
(4) IRC section 457 plans (with respect to deferred
				  compensation plans of state and local governments and tax exempt
				  organizations); but it does not include previously taxed contribution. These
				  amounts are included in the pretax employee contribution even though the IRC
				  may provide that the amounts are considered employer contributions for some
				  purposes.
"Previously taxed contribution" means the aggregate amount
				  of contributions that:
(1) Were included in the employee's gross income under the
				  Hawaii Income Tax Law, whether or not Hawaii income tax was actually due or
				  paid; or
(2) Would not have been includable in gross income under the
				  Hawaii Income Tax Law applicable at the time of contribution if the employee
				  were a Hawaii resident and the contributions were paid directly to the employee
				  at the time.
Previously taxed contribution includes amounts included in
				  the gross income of an employee under section 402(b) (with respect to
				  taxability of beneficiary of nonexempt trust) or 403(c) (with respect to
				  taxability of beneficiary under nonqualified annuities or under annuities
				  purchased by exempt organizations), IRC.
(d) The following rules shall be used to
				determine previously taxed contribution, employer contribution, and pretax
				employee contribution.
(1) The employer and
				employee shall be assumed to be Hawaii residents throughout the period of
				employment, regardless of their actual residence.
(2) Amounts transferred between plans on a
				nontaxable basis, including amounts paid into a rollover individual retirement
				account, shall retain their character, as between employer contribution, pretax
				employee contribution, and previously taxed contribution.
(3) Interim distributions, such as payments
				made to a spouse or former spouse pursuant to an order described in section
				414(p) (relating to qualified domestic relations orders), IRC, hardship
				withdrawals, and any other early distributions, shall be disregarded in
				computing the exclusion ratio in subsection (e)(1).
(4) Amounts treated as a refund of the
				consideration paid under section 72(c)(2) (with respect to adjustment in
				investment where there is refund feature), IRC, shall be subtracted from
				previously taxed contribution.
(5)
				Previously taxed contribution includes amounts attributable to life insurance
				protection under Treas. Reg. § 1.72-16(b) (with respect to treatment of
				cost of life insurance protection) that are included in the employee's gross
				income at the time of contribution.