Fiscal Note
Fiscal Services Division
HF 2638 – Retirement Income Exemption, Deferred Compensation Plans (LSB5596HV)
Staff Contact: Eric Richardson (515.281.6767) eric.richardson@legis.iowa.gov
Fiscal Note Version – New
Description
House File 2638 excludes up to $500,000 of a nonqualified deferred compensation plan or
attributable earnings from the computation of net individual income tax for someone who is
disabled, 55 years of age or older, or the surviving spouse of an individual or a survivor having
an insurable interest in an individual who would have qualified for an income tax exemption.
The Bill applies retroactively to tax years beginning on or after January 1, 2024.
Background
Beginning in tax year (TY) 2023, 2022 Iowa Acts, House File 2317 (Income Tax Rate Reduction
and Exemptions Act) exempted all income defined as retirement income from the State
individual income tax for disabled taxpayers and taxpayers aged 55 years or older. The
exemption also applied to a deceased person’s retirement income that is received by a surviving
spouse or a person with an insurable interest in the deceased person. House File 2317 did not
alter the full retirement pay exemption available to retired military personnel, which is not based
on age or disability. House File 2317 also excluded retirement income from the calculation of
Iowa’s universal and age-based low-income full exemptions from individual income tax.
According to the Internal Revenue Service, a nonqualified deferred compensation plan is an
elective or nonelective plan, agreement, method, or arrangement between an employer and an
employee to pay the employee compensation in the future. A qualified deferred compensation
plan is subject to compensation deferral limits, similar to 401(k) and 457(b) plans, while a
nonqualified deferred compensation plan is deferred compensation with no federal legal deferral
limit that is subject to tax at a later date. 42 C.F.R. §413.99 defines qualified and nonqualified
compensation plans for federal tax purposes. Nonqualified deferred compensation plans do not
adhere to federal requirements specified in 26 U.S.C. §401(a). Nonqualified compensation
plans may be used by individuals who already contribute the maximum to qualified
compensation plans and represent another method for tax-free retirement contributions.
Nonqualified compensation plans do not allow early distributions, loans, or rollovers (unlike
qualified plans), and tax must be paid on distributions when made. Nonqualified compensation
plans can have varying structures, compositions, and conditions for disbursements.
The Iowa Department of Revenue (IDR) submitted a rulemaking to the Administrative Rules
Review Committee in February 2024 that listed qualified retirement income for income tax
exemptions. Nonqualified deferred compensation plans described in 26 U.S.C. §409A do not
qualify for an income tax exemption under current Iowa law, per the IDR.
Assumptions
• Under the Bill, there are taxpayers in Iowa who will realize income tax benefits from their
deferred compensation plans, although the IDR does not have an informed estimate of
these fiscal impacts.
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• The Bill will have a negative fiscal impact on the General Fund and local surtax due to the
reduction in income tax liability.
Fiscal Impact
House File 2638 would have a negative fiscal impact on the General Fund, although an
estimate cannot be made due to a lack of information on deferred compensation plans in Iowa.
Sources
Internal Revenue Service
Iowa Department of Revenue
Legislative Services Agency
/s/ Jennifer Acton
March 4, 2024
Doc ID 1447496
The fiscal note for this Bill was prepared pursuant to Joint Rule 17 and the Iowa Code. Data used in developing this
fiscal note is available from the Fiscal Services Division of the Legislative Services Agency upon request.
www.legis.iowa.gov
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Statutes affected:
Introduced: 422.7