TAKING BUT NOT TAXING PENSIONS OVER STATE LINES

WASHINGTON-States no longer would be allowed to tax pension benefits of non-resident retirees under legislation approved last month by the House and Senate and sent to President Clinton for his signature.

The measure, H.R. 394, eliminates what pension lobbyists say had become a growing problem: a state attempting to tax pension benefits of retirees who formerly lived in the state but moved to another state at retirement.

About a dozen states have laws that permit them to tax non-residents' pension benefits, with California being the most aggressive, benefit lobbyists said.

Lobbyists describe the legislation as a victory for the retirement benefit plan system.

"It protects retirement benefits from excessive taxation. States wanted to tax retirees who had few resources to fight back," said Mark Ugoretz, president of the ERISA Industry Committee, a Washington-based benefits lobbying organization representing large employers.

State efforts to tax pension benefits of former residents put retirees in a difficult position. In a typical situation, a state will assert that its tax should be applied on a retiree's full monthly pension benefit, or, in the case of many defined contribution plans, the lump-sum benefit.

Retirees-in the case of those who may have lived in several different states while working for an employer-then have to prove that they lived in the state attempting to tax their pension benefits for only a portion of the time in which they earned the benefit.

That means digging up decades-old records, which may no longer have existed, noted Janice Gregory, a vp at the ERISA Industry Committee. That, of course, could create administrative burdens for employers as well as a hassle for retirees.

Legislators viewed attempts by states to tax pension benefits of former residents as taxation without representation.

"The source tax is truly taxation without representation. By levying a source tax, states are able to target the retirement income of non-residents even though the non-residents receive no benefits or services in return for the assessed taxes," said Rep. Linda Smith, R-Wash.

"Retirees should not be forced to pay taxes to states in which they no longer reside and no longer vote," concurred Rep. Jennifer Dunn, R-Wash.

The measure applies to all qualified defined benefit and defined contribution plans. Non-resident states also could not tax benefits provided under certain types of non-qualified deferred compensation plans, including those that provide equal periodic payments over a retiree's expected lifetime or over a 10-year period.

In addition, non-resident states could not tax benefits provided through so-called excess non-qualified plans. An excess plan is one designed to provide benefits in excess of certain Tax Code limits that apply to qualified plans.

The legislation would apply to pension benefits received after Dec. 31, 1995.

President Clinton is expected to sign the bill.