Document Number
82-95
Tax Type
Withholding Taxes
Description
VA withholding tax to a qualified cash or deferred arrangement plan
Topic
Payment and Refund
Taxability of Persons and Transactions
Date Issued
07-07-1982
July 7, 1982



Re: Request for Ruling/Withholding Tax
    • Cash or Deferred Arrangements


Dear ***********************

This will reply to your letters of May 12 and May 21, 1982 in which you request a ruling on the applicability of the Virginia withholding tax to a qualified cash or deferred arrangement plan set up by ***********.
Facts

**************** has redesigned a portion of its savings and thrift plan to include a cash or deferred arrangement. The existing plan is an IRS qualified plan and the cash or deferred arrangement will meet the qualifications of Internal Revenue Code (hereinafter "IRC") § 401K. As a result the cash or deferred arrangement will qualify as a part of a trust qualified under IRC § 40l(a).

Under the terms of a cash or deferred arrangement, an employee may elect to have the employer make payments to the qualified trust on the employee's behalf or to have the employer make payments in cash directly to the employee. ********* plan will also provide for matching employer contributions to the trust, up to a maximum amount, where employees elect to contribute to the qualified trust.
Determination

§ 58-151.1(F)(I) of the Code of Virginia excludes from the definition of "wages" for the purposes of income tax withholding remuneration Paid to or on behalf of an employee or his beneficiary.
    • From or to a trust described in § 40l(a) of the Internal Revenue Code of the United States of 1954 which is exempt from tax under § 501(a) of the Internal Revenue Code at the time of such payment unless such payment is made to an employee of the trust as remuneration for services rendered as such employee and not as a beneficiary of the trust.

IRC § 501(a) exempts from taxation trusts qualifying under IRC § 40l(a) unless they are subjected to tax under IRC §§ 502 or 503. Since you indicate that the existing plan is a "qualified" plan, we will assume that it is qualified under both IRC §§ 40l(a) and 501(a). Therefore, Virginia Code § 58-151.1(F)(I) would exempt from withholding payments to the employee or his beneficiary from a qualified trust or payments on behalf of the employee or his beneficiary to a qualified trust. For these purposes a "qualified trust" is one which is included under IRC § 501(a). Assuming that cash or deferred arrangement meets the requirements of IRC § 40l(k) for inclusion into a qualifying trust plan, payments to or from the trust far employees will not be included in the definition of wages subject to withholding tax.

It should be noted that there are no statutory provisions for exempting from the withholding tax payments to employees who elect a cash option rather than payment to a qualified trust. Additionally, disbursements from the trust to the employee, while not subject to withholding tax, will be subject to the income tax to the extent included in federal adjusted gross income and any lump sum distribution from the plan may be subject to the special provisions of Virginia Code § 58-151.013(b)(4).

Sincerely,



W. H. Forst
State Tax Commissioner

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46