Retirement benefits are taxable by the federal government upon receipt. However, a portion of your monthly benefit may be tax excludable.

The federal government requires the tax excludable amount be calculated based on your total contributions which have been taxed and a factor which takes into account your life expectancy. If a survivor’s benefit will be payable after your death, your spouse’s life expectancy will also be taken into account. This results in a payout of your tax excludable contributions over your expected lifetime.

Tax excludable:

• PERS Members: Mandatory employee contributions made before January 1, 1987, indebtedness principal and interest payments made with after-tax dollars, and any voluntary contributions.
• TRS Members: Mandatory employee contributions made before January 1, 1991; indebtedness principal and interest payments made with after-tax dollars.
• JRS Members: Mandatory employee contributions made before July 1, 2002; and any indebtedness principal and interest payments.
• EPORS Members: All mandatory employee contributions; and any indebtedness principal and interest payments.

Contributions and interest which have not been taxed and are subject to federal income tax include:

• PERS Members: Mandatory employee contributions made after December 31, 1986; and all interest earned on employee contribution accounts.
• TRS Members: Mandatory employee contributions made after December 31, 1990; and all interest earned on employee contribution accounts.
• JRS Members: Mandatory employee contributions made after June 30,2002; and all interest earned on employee contribution accounts.
• EPORS Members: All interest earned on employee contribution accounts.

You will be notified of the tax excludable portion after your final contributions are received from your employer. If you have not received notice within 90 days, contact the Division of Retirement and Benefits.

Distribution Code

The IRS defines the use of Distribution Code “7” on your 1099-R Form as a normal distribution from a plan when the benefit recipient is at least 59-1/2 years old. The IRS requires the use of Code “2” (early distribution, exception applies) for normal distributions from a plan when the benefit recipient is under the age of 59-1/2.

The IRS considers a distribution prior to age 59-1/2 to be an early distribution, however, our understanding is a lifetime pension benefit payout falls under an IRS exception to any early withdrawal penalty. If you have questions on whether it might affect your individual case, you should contact your tax consultant or the IRS.

Multiple Form 1099-R Benefit Recipients

The Division issues multiple Form 1099-Rs when a normal benefit recipient turns age 59-1/2 during the year. Distributions that were made before age 59-1/2 will most likely reflect a Code “2” for the IRS Distribution Code on the Form 1099-R. Distributions made after age 59-1/2 will have a Code “7” reflected.

In addition, if you are receiving multiple benefits, you may receive multiple Form 1099-Rs.

Same-Sex Partner Health Benefits

Imputed income attributable to same-sex partner health benefits is reported on IRS Form W-2.

In accordance with U.S. v. Windsor and Revenue Ruling 2013-17, for federal tax law purposes only, the IRS will recognize a marriage between same-sex individuals that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex. If you have a marriage certificate on file with the Division you will not be issued a Form W-2 to impute same-sex partner health benefits.

National Guard/Naval Militia Benefit Distributions

If you take an actuarially determined lump sum distribution from the National Guard/Naval Militia Retirement System (NGNMRS) and it is a direct rollover to a traditional IRA, your IRS Distribution Code in box 7 will be “G” and your taxable amount in box 2a will be zero. If you separate from service in the year you turn age 55, then your IRS Distribution code will be “2”. Any other distribution from the NGNMRS before age 59-1/2 will have an IRS Distribution Code of “1”, and your distribution will be reported as fully taxable in box 2a. Distributions after age 59-1/2 will have a distribution code of “7”.

To assist you in planning for your retirement, we have developed the Retiree Net Pay Estimator to be used in conjunction with the Benefit Estimator found in myRnB when you log into your account.

PERS non-occupational disability benefits and TRS disability benefits are taxable as income upon receipt. In addition, since the PERS and TRS definitions of disability differ from that of the Internal Revenue Service, the benefit may be subject to the 10% IRS penalty for early distribution. A disabled member may seek an exception to the penalty by filing IRS Form 5329 when submitting their tax return.

PERS occupational disability benefits are generally excluded from taxation and penalty. Members who entered PERS prior to July 1, 1977 have different options for occupational disability, some of which are taxable. Contact the division for more information if you are in this category.

Occupationally disabled peace officers and firefighters who elect to continue their disability benefit calculation at normal retirement will go from nontaxable to taxable status. This is because the disability benefit becomes a normal retirement benefit, and no longer meets IRS rules regarding occupational disability.

All Teachers’ Retirement System (TRS) and Public Employees’ Retirement System (PERS) non-occupational and occupational disability benefit recipients will receive a Form 1099-R with an IRS Distribution Code of “2” or “7”. The Division codes the Form 1099-R this way because the requirement necessary to meet the federal definition of disability is far more stringent than the requirement necessary to meet the retirement systems’ definition. In this case, Form 1099-R coding is ruled by federal law, not the Alaska State retirement system statutes or determinations.

Monthly survivor’s benefits are taxable by the federal government upon receipt. However, a portion of the monthly survivor’s benefit may be tax excludable depending on the member’s circumstances at the time of death.

The tax excludable amount is calculated based on your total taxed monthly contributions and factoring your spouse’s life expectancy. The tax excludable contributions are then paid out over your spouse’s lifetime.

If you are a survivor and receive a death benefit distribution, the IRS Distribution Code in box 7 will be “4” on your 1099-R Form, and the amount reported in box 2a will be the taxable portion of your distribution. If you elect to have the distribution be a direct rollover to a traditional IRA, the distribution code will be “4G” and the taxable amount in box 2a will be zero.

If you are the survivor of a peace officer who died in the line of duty, your taxable amount in box 2a will be zero and the IRS Distribution Code will be “4”.

Most members who made “after-tax” contributions to their retirement account, for example: if a member paid an indebtedness by writing a check to the division, will see a taxable amount different than their total gross distribution. The difference will be the amount of your benefit that is excludable from federal taxes. The taxable amount reflected in box 2a different than the amount noted in box 1. The difference will be the amount in box 5, which is the amount of your benefit that is excludable from federal taxes.

You may change your withholding option at any time by submitting a new W-4P to the division.

When you are appointed to receive monthly benefits, federal income tax will automatically be withheld from your benefit. If you do not send the Division of Retirement and Benefits a Form W-4P , the IRS requires your default withholding to be single with zero adjustments. If you choose to not have income tax withheld, you may indicate “no withholding” under Step 4(c).

Remember! When submitting this form, please indicate for which fund (e.g., PERS, TRS, SBS, etc.) you would like your form processed.

Each January, you will be sent a 1099-R showing the benefit payments and federal income tax withheld from your checks during the previous calendar year.

Sample Form 1099-R from the IRS Website

Download the 1099-R Newsletter

You can also read the 1099-R Newsletter online here.

1. Gross Distribution:

   The gross amount of all checks disbursed for the calendar year from January 1 through December 31.

2. Taxable Amount:

   The amount that the Division of Retirement and Benefits reports to the IRS as your taxable benefit. If this box is blank, please read the explanation of box 2b.

3. Taxable Amount Not Determined:

   If there is an “X” in this box, the Division of Retirement and Benefits has not determined what portion of your benefit is taxable. When filing your tax return, you must report what is taxable. For this determination, we recommend that you consult a tax accountant or review IRS Publication 575–Pension and Annuity Income .

4. Federal Income Tax Withheld:

   This is the amount of federal taxes which the Division withheld from your benefit for the prior tax year. If, after completing your taxes, you determine that you would like to adjust this amount in the future, please submit a Form W-4P to the Division of Retirement and Benefits.

5. Employee Contributions or Insurance Premiums:

   This is the amount of your benefit which is excluded from federal taxes. The amount in box #5 is calculated using the Simplified Method, as described in IRS Publication 575–Pension and Annuity Income .

6. Distribution Code:

   Depending on such factors as the type of benefit received and age, all members will receive an IRS Distribution Code in box #7. The code does affect how the benefit will be taxed. To determine how the distribution code may impact your individual tax situation, please call your tax consultant or contact the Internal Revenue Service.

Your 1099-R Form will be coded in accordance with the tax law. However, if you believe you have received an incorrect 1099-R Form, please contact the Member Education Center.