Tim Zellmer, Assist. General Counsel, Exec. Comp & Benefits, General Mills Gina DeConcini, Partner, Oppenheimer Wolff & Donnelly LLP

Transcription

1 Tim Zellmer, Assist. General Counsel, Exec. Comp & Benefits, General Mills Gina DeConcini, Partner, Oppenheimer Wolff & Donnelly LLP #

2 Agenda 2008 Legislation Affected Deferred Employer Responsibilities Current Guidance and Unresolved Questions Stock Options Severance Other Deferred Practical Challenges Questions

3 2008 Legislation Sec. 7. Statutes 2006, section , subdivision 2, is amended to read (a)(1) Subject to paragraphs (a)(2), and (a)(3), and (a)(4), income from wages as defined in section 3401(a) and (f) of the Internal Revenue Code is assigned to this state if, and to the extent that, the work of the employee is performed within it; all other income from such sources is treated as income from sources without this state.... (3) For purposes of this section, amounts received by a nonresident as "retirement income" as defined in section (b)(1) of the State Income of Pension Income Act, Public Law , are not considered income derived from carrying on a trade or business or from wages or other compensation for work an employee performed in, and are not taxable under this chapter. (4) Wages, otherwise assigned to this state under clause (1) and not qualifying under clause (3), are not taxable under this chapter if the following conditions are met: (1) the recipient was not a resident of this state for any part of the taxable year in which the wages were received; and (ii) the wages are for work performed while the recipient was a resident of this state.

4 Affected Nonresident Income from the exercise of nonqualified stock options Severance or salary continuation payments Nonqualified plan distributions paid out over less than a ten year period.

5 Unaffected Nonresident Qualified plan distributions Non-qualified plan distributions that are paid out in substantially equal periodic payments over at least a 10 year period Non-qualified plan distributions paid under a pure excess benefit plan.

6 Employer Responsibilities withholding for affected compensation paid to nonresidents required beginning April 1, Reporting required for all payments of affected compensation paid to nonresidents in 2008 on 2008 W-2. Employers revising or adopting plans should consider new law when designing options and other compensation.

7 Dept. of Revenue Guidance Revenue Notice #08-10 Withholding Tax Fact Sheet 19 Despite multiple requests for further guidance, the Department has indicated that it currently has no plans to update, revise, or add to this guidance.

8 Fact Sheet Stock Option Examples Example 1 Nonqualified stock options are measured for the period from grant to vest, and where those two dates are the same all income is allocated to the location where the employee is assigned on the grant/vest date. Example 2 Where grant date and vest date are separate, income is allocated based on time worked in over total time worked between grant and vest. Includes nonresident employees who enter to work only on a temporary basis. Example 3 Where vesting occurs in separate traunches, income from each traunch is analyzed separately. (Note that fact sheet uses years rather than work days to quantify result)

9 What the fact sheet does NOT tell us about allocating stock option income...

10 Fact Sheet Severance Examples Example 1 Severance is taxable as compensation. Where severance is based on years of service, the portion that relates to the time spent working in is includable in income. Example 2 Where severance arises pursuant to the terms of an employment contract, the allocation period is the term beginning when the employment contract came into effect through the termination date. Where reciprocity applies, eligibility for reciprocity is measured based on where the employee lives at the time severance payments are received and not where they lived when the income was earned.

11 What the fact sheet does NOT tell us about allocating severance income...

12 Other Deferred Comp Examples Example 1 Example of allocating income from a SERP that is not federally preempted. Example uses years of service in MN over total years of service with the company to allocate income, but presumes all days of full years worked in single states. Example 2 Clarifies that deferred income that can be tracked to specific periods of accrual can be independently allocated. Example assumes all days of the year are work days, and indicates that any earnings on the taxable deferred compensation are also assigned to in the same manner. (We will revisit this example in the administrative issue discussion) Example 3 Example of allocating deferred bonuses based on the measurement term over which the bonus was earned. Example 4 Example of income from a federally preempted qualified pension plan and SERP. Federally preempted income is not taxable to nonresidents.

13 What the fact sheet does NOT tell us about allocating other deferred compensation...

14 Practical Considerations

15 Practical Considerations What if historical records of time spent in the state are not available? Can the employer rely on employee affidavits? Does the DOR honestly expect employers to be able to do the kind of allocations described in some of the examples? Can employers just follow historical state income tax withholding jurisdictions? What about minimum filing thresholds? What s on the political horizon? Will more states go after nonresident income tax? Jump on the MN/NY bandwagon?

16 Questions?