What is the Bailey Settlement?

As a result of the North Carolina Supreme Court's decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local government or by the United States government retirees (including military). The exclusion applies to retirement benefits received from certain defined benefits plans, such as the North Carolina Teachers' and State Employees' Retirement System, the North Carolina Local Governmental Employees' Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees' Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989.

This exclusion also applies to retirement benefits received from the North Carolina's 401(k) and 457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989. This exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and their political subdivisions.

If you're entitled to exclude your retirement benefits under the Bailey Settlement, enter the amount of your excludable retirement benefits that were included in your federal taxable income.

Distributions from most types of retirement plans may be rolled over into another retirement plan or into an IRA. Because rollover distributions lose their character upon rollover, all distributions from a qualifying Bailey retirement account in which the employee / retiree was vested as of August 12, 1989, are exempt from state income tax regardless of the source of the funds contained in the account. Conversely, qualifying tax-exempt Bailey benefits rolled over into another retirement plan lose their character and would not be exempt upon distribution from the other plan unless the plan is a qualifying Bailey retirement account in which the employee was vested as of August 12, 1989.

Rollovers to IRAs will always result in a loss of tax-exempt status since IRAs do not qualify under the Bailey settlement.

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