William E. MacDonald’s employer offered a supplemental executive retirement plan (SERP) for its executives. MacDonald made a plan election to receive periodic annuity payments throughout retirement, rather than a lump sum. Accordingly, MacDonald’s W-2 presented the present value of his future annuity payments as Medicare wages and excluded this amount in local wages. Pensions are exempt from taxation under the Shaker Heights tax ordinance. Therefore, MacDonald did not pay municipal taxes on this amount to the City of Shaker Heights.
Supplemental Executive Retirement Plan Tax
The Shaker Heights tax administrator and the municipal tax board assessed a tax on the amount in question ruling that it qualified as taxable wages and not as a pension. MacDonald appealed to the Board of Tax Appeals (BTA) contesting that he did not owe local tax on the SERP amount. The BTA ruled in favor of MacDonald, reversing the municipal tax board’s decision. The BTA’s reversal was challenged by the City of Shaker Heights on two counts: the taxability of the pension proceeds and the right of the taxpayer to challenge a municipal court decision by presenting additional information directly to the BTA. The Tenth District Court of Appeals affirmed the BTA’s ruling that the SERP amount was a qualified pension and could not be taxed by the municipality and found MacDonald’s presentation of new information to the BTA was acceptable.
The City of Shaker Heights challenged this ruling by petitioning the Ohio Supreme Court On August 19, 2015 the Ohio Supreme Court ruled in favor of MacDonald.
Similarly, the City of Cincinnati exempts pensions and qualified retirement plans from tax, unless the payments are deemed to be qualifying wages. Retiring taxpayers are advised to review SERP and other retirement payments for the correct local tax treatment on their W-2 to avoid overpaying tax.
For questions regarding this ruling, or to speak more with a Barnes Dennig tax specialist about how you may be affected, contact us here.
2 Municipal Code, City of Cincinnati, Sec. 311-15.