1. (a) Retirement or disability benefits — Arkansas Code § 26-51-307.

   1. (1) The first six thousand dollars ($6,000) of retirement or disability benefits received by a resident of Arkansas from an in-state or out-of-state retirement plan or program will be exempt from Arkansas income tax if the:

      1. (A) Retirement plan or program is directly related to either public or private employment; and
      2. (B) Arkansas resident is the employee or former employee owner of the plan or the employee or former employee's spouse.

   2. (2) Plans or programs that could fall within the scope of this exemption are:

      1. (A) Pension plans;
      2. (B) Profit sharing plans;
      3. (C) Stock bonus plans;
      4. (D) Employee stock ownership plans (ESOPs);
      5. (E) Annuity plans;
      6. (F) Thrift and savings plans;
      7. (G) Cash or deferred arrangements (CODAs, also known as 401(k) plans); and
      8. (H) Simplified employee pension (SEP) plans.
   3. (3) An individual retirement account (IRA) will fall outside the scope of this exemption unless it is established by an employer as an SEP.
2. (b) Premature distribution — Arkansas Code § 26-51-307. A premature distribution taken by an Arkansas resident from a retirement plan or program that meets all of the criteria set forth above would qualify for the exemption.

3. (c) Divorce — Arkansas Code § 26-51-307.

   1. (1) A taxpayer's interest in an ex-spouse's employment-related retirement plan or program acquired through a divorce is eligible for this exemption only if the interest was awarded pursuant to a qualified domestic relations order (QDRO).
   2. (2) I.R.C. § 402(e)(1)(A) requires that an alternate payee (i.e., taxpayer) who is a former spouse of a retirement plan participant be treated just like the participant with respect to any payments made to the alternate payee under a QDRO.
   3. (3) Note that Arkansas has adopted Sections 72, 219, 401 – 404, 406 – 416 inclusive, and 457 of the Internal Revenue Code of 1986. Example: 1. Mary was divorced from James by a decree dated May 4, 1993. 2. As a part of the property settlement contained in the decree, Mary was awarded an interest in James' 401(k) retirement plan pursuant to a qualified domestic relations order (I.R.C. § 414(p)). 3. Mary received seven thousand dollars ($7,000) from James' 401(k) retirement plan in 1994. 4. Although Mary would report seven thousand dollars ($7,000) in the gross income section of her Arkansas individual income tax return for 1994, she would be entitled to the six-thousand-dollar exemption and would pay income tax only on the one-thousand-dollar balance of the distribution.

4. (d) Military-related benefits — Arkansas Code § 26-51-307.

   1. (1) Only the first six thousand dollars ($6,000) of military retirement pay based on length of service is exempt from Arkansas income tax.
   2. (2) However, pursuant to I.R.C. § 104(a)(4), the full amount of a military disability pension (with no six-thousand-dollar cap) is exempt from Arkansas income tax so long as the pension is for personal injuries or sickness resulting from active service in the United States Armed Forces.
   3. (3) Likewise, military retirement pay, to the extent that it is based upon a military-related disability, would be exempt above and beyond the first six thousand dollars ($6,000) received.

Codification Notes: I.R.C. § 402(e)(1)(A) is codified at 26 U.S.C. § 402(e)(1)(A). I.R.C. § 414(p) is codified at 26 U.S.C. § 414(p). I.R.C. § 104(a)(4) is codified at 26 U.S.C. § 104(a)(4).