Supplemental Executive Retirement Plan (“SERP”) Was A Pension Exempt From City Income Tax
The Tenth District Court of Appeals affirmed the Ohio Board of Tax Appeals (“BTA”) determination that a SERP provided a pension benefit even though it was part of a nonqualified deferred compensation plan. See McDonald v. City of Shaker Heights Income Tax Board of Review, Court of Appeals of Ohio, Tenth District, No. 13 AP-71, February 27, 2014.
The SERP benefit at issue was not a salary deferral and was unfunded before the taxpayer’s retirement. The benefit was intended to replace a portion of the taxpayer’s pre-retirement income after taking into consideration other benefits to be received through a qualified plan and Social Security. It was received in the form of joint and survivorship annuity measured by the joint lives of the taxpayer and his wife.
The City of Shaker Heights (“City”) sought to tax the present value of the SERP benefit, even though “pension” income was specifically exempted from taxation under the City’s Codified Ordinances. However, the Ordinances failed to define what constituted a pension. So, the BTA used the common meaning of pension – “any plan sponsored by an employer that provides for post-retirement income that’ s designed to support their income for life.” The SERP benefit at issue met this definition and was, therefore, not subject to city income tax. Particularly important appears to be the fact that no portion of the taxpayer’s salary had been deferred and the SERP had not been funded prior to retirement. The Court of Appeals concluded that the BTA’s decision was sufficiently supported and was not unreasonable or unlawful.
Many municipalities have similar taxing statutes, but have also taxed these types of SERP benefits. Refund claims may be available if the tax was paid within the recent past. This decision can also be relied upon in addressing the taxability of other post-employment benefits paid by an employer, especially where the taxing authority does not explicitly define the nature of its nontaxable income, such as pension income.