Current through Register Vol. 42, No. 11, August 30, 2024
(1)
DEFINITIONS. The following terms have these meanings
for the purposes of this rule:
(a)
Administrative Downsizing. A reduction in the
employer's workforce or discontinuance or relocation of the operations of the
employer in accordance with a business plan. Administrative downsizing does not
include:
1. The transfer or exchange of
employees between related taxpayers as described in
26
U.S.C. §
267.
2. The transfer or exchange of employees to
another legal entity with such employees continuing to perform essentially the
same or related duties for the former employer.
(b)
Displaced from
Employment. Termination of the employer/employee relationship due
to an employee's job being abolished or relocated.
(c)
Employee. A
common law or statutory employee as defined by the Internal Revenue
Code.
(2)
Severance Pay Qualification. To qualify for the
exemption, the payment must be:
(a) Received
pursuant to a plan of administrative downsizing which has been submitted to and
approved by the department
(b)
Received from the employer under the following conditions.
1. As severance pay, unemployment
compensation, termination pay, or from a supplemental income plan.
2. By an employee who is terminated, laid
off, fired, or displaced from employment.
3. As a result of administrative
downsizing.
(3)
Exemption Allowed by Tax Year.
(a) For tax years beginning January 1, 2020,
the exemption is limited to the first fifty thousand dollars ($50,000)
severance pay received in each tax year for each displaced worker.
(b) For tax periods beginning on or after
January 1, 1997 through December 31, 2019, the exemption is limited to the
first twenty-five thousand dollars ($25,000) received in any year for each
displaced worker.
(c) Severance
pay, whether paid as a lump sum or in installments, granted prior to January 1,
1997, is not exempt from Alabama individual income
taxation.
(4) Alabama
income tax withholding requirements for the employer do not apply to payments
exempted under this section if the employer has obtained exemption approval
from the department.
(5)
Qualifying Payments. If all other requirements of this
section are met, qualifying payments for this exclusion include but are not
limited to:
(a) Certain union
benefits.
(b) Certain payments
received from voluntary employee's beneficiary associations.
(c) Certain payments to laid-off employees
from company-financed, supplemental unemployment compensation benefit plans,
also known as "guaranteed annual wage plans".
(6)
Non-qualifying
Payments. Payments made to employees not qualifying for this
exemption include but are not limited to:
(a)
Payments made for accumulated sick leave, annual leave, vacation time, or
unused benefits unless only offered as an incentive or inducement for early
retirement.
(b) Cancellation of
contract payments made to independent contractors or others not deemed to be
employees of the payor.
(c)
"Parachute payments" or any other payments made due to termination of
employment for any reason other than administrative downsizing.
(d) Retirement benefits received as a result
of a voluntary retirement due to administrative downsizing.
(e) Payments made by the employer in
compensation for services (previous or future), repurchase, redemption, or
retirement of stock or similar equity interests, or any interest therein or
option thereto, or in consideration of a non-compete agreement, contractual or
legal claim.
(7)
Exemption of a payment from income taxes is allowed only when the substance of
the transaction fairly meets the requirements of this rule and the statute. The
form of the transaction is usually unimportant.
(8)
Application for Exemption
Approval Required by Employers. Employers must apply for approval
of the exemption by submitting a written request to the department. In the
request, employers must submit their plan for administrative downsizing that
includes, but is not limited to:
(a) A
complete description of the benefits paid to the displaced
employee(s).
(b) A complete
description of the downsizing plan itself, that includes, but is not limited
to:
1. The number and description of employees
affected.
2. The reasons for
administrative downsizing.
(c) The aggregate amount of benefits to be
paid to affected employees which will be exempt from Alabama individual income
taxation.
(d) The request must be
filed at least annually if the administrative downsizing plan continues into
the next year.
(9)
Termination due to Misconduct. Notwithstanding
anything to the contrary herein, neither the employer nor the employee is
exempted from the income tax withholding requirements if the employee was
terminated, fired, or constructively fired through voluntary resignation due to
misconduct. Likewise, employees who were terminated, fired, or constructively
fired through voluntary resignation due to misconduct are not allowed to take
the tax exemption on their income tax return.
Authors: Laura Walden, Kathleen Abrams
Statutory Authority:
§§
40-2A-7(a)(5) and
40-18-19.1,
Code of Ala. 1975.
