New massachusetts directive
Massachusetts has recently issued a directive denying favorable tax treatment of 401(k) deferrals to partners and other selfemployed individuals. The denial of favorable state tax treatment applies both to a partner's 401(k) deferrals and matching contributions. Under Massachusetts tax law, deductions to tax-qualified plans made on behalf of the self-employed have historically been disallowed. Until now, there was no similar prohibition of the tax exclusion of 401(k) deferrals. The new rule applies to members of LLPs, LLCs and any other persons taxed as partners, as well as to sole proprietors. However, employees of partnerships and sole proprietorships may continue to make 401(k) deferrals on a taxexempt basis that can be matched tax-free to them.
2008 effective date
Beginning with plan years in 2008 and thereafter, Massachusetts will disallow both state tax exclusions and tax deductions for 401(k) deferrals and matching contributions for partners and other self-employed individuals. Unless and until this directive is overturned by legislation, all partners and individuals treated as partners through business organizations taxed as partnerships (LLPs and certain LLCs) must report their 401(k) deferrals as taxable income on their Massachusetts state tax returns.