Law Article: Tribal deferred per capita plans can reduce taxes

Tuesday, September 15, 2015  

Members of the Fort Peck Tribes of Montana lined up to receive a per capita payment in October 2012. Photo from The Fort Peck Journal / Facebook

Attorneys Kathleen M. Nilles and Kenneth Parsons explain the benefits of a deferred per capita plan that can reduce tax liabilities for tribal members who receive per capita payments:

A deferred per capita plan is a plan sponsored by an Indian tribal government that permits its members to voluntarily invest a portion of their per capita distributions in a tax-deferred savings vehicle. It is similar to a 401(k) plan sponsored by employers for their employees and almost identical to an executive deferred compensation plan. However, since per capita payments are not "earned income," they cannot be contributed to an individual retirement account, a 401(k) plan or other compensation-oriented plans.

In addition to the tax savings discussed below, deferred per capita plans permit tribal members to contribute to a long-term savings account that grows in value on a tax-deferred basis. For some tribes, per capita distributions from gaming are high right now, but this boom is not guaranteed to last. By saving a portion of their distributions, members can plan for the future and not have to depend exclusively on future tribal revenue. This way, if the current per capita distributions decrease, members will still have financial resources. This may be especially important for members who are in or nearing their retirement years or who support family members who do not qualify for per capita distributions.

The federal tax savings that deferred per capita plans create are twofold: (1) reduced taxation on current per capita distributions, and (2) tax-free growth of contributions to the plan. Amounts contributed to the deferred per capita plan by the tribe on behalf of a participant are not subject to taxation in the year during which the contribution is made. Instead, they are taxed when they are distributed or otherwise made available for distribution. Also, the contributions grow tax-deferred because investment gains are taxed only when they are distributed or made available for distribution.

Get the Story:
Kathleen M. Nilles and Kenneth Parsons: A Tribal Financial Executive's Guide To Deferred Per Capita Plans (Mondaq.Com 9/15)

Relevant Documents:
Internal Revenue Service Private Letter Ruling 199908006 (February 1999)