Is a lump-sum settlement of SERP and deferred compensation plan benefits that a nonresident received after his former employer's bankruptcy exempt from New York income tax?

Plain-English summary

Petitioner, a nonresident of New York, was an executive vice president at Dime Savings Bank of New York, a New York corporation, when Washington Mutual Bank ("WMB") acquired Dime in January 2002. Rather than continue with WMB, Petitioner retired. He had been a participant in Dime's nonqualified supplemental employee retirement plan ("SERP") and its Deferred Compensation Plan, both of which qualified as "nonqualified deferred compensation plans" under IRC § 3121(v)(2)(C). Starting in March 2002, when he turned 55, Petitioner received fixed monthly SERP payments for life; starting in 2003 he began receiving quarterly Deferred Compensation Plan payments that varied with the plan's investment earnings over a 12-year term.

In 2008, WMB filed for bankruptcy in Delaware, was seized by the FDIC, and had its assets sold to JPMorgan Chase. Under a Global Settlement Agreement, JPMorgan Chase was not required to formally assume the nonqualified plans, but it did have to satisfy the obligation to pay the benefits owed under them, and it was authorized to change the manner and form of the payments. In May 2012, JPMorgan Chase disbursed to Petitioner a single lump sum representing the present value of the SERP annuity, the Deferred Compensation Plan balance, and interest that accrued while payments were suspended during the bankruptcy. JPMorgan Chase withheld New York State and local estimated income tax from the distribution. Petitioner has since lived in New Jersey, Virginia, and now Pennsylvania, but has never been a New York resident. He asked whether the lump sum is exempt from New York personal income tax.

The Department concluded that it is. Federal law - 4 U.S.C. § 114(a), added by Public Law 104-95 - bars a state from taxing the "retirement income" of an individual who is not a resident or domiciliary of that state, for amounts received after December 31, 1995. Section 114(b)(1) defines "retirement income" to include payments from a nonqualified deferred compensation plan described in IRC § 3121(v)(2)(C), so long as the income is part of a series of substantially equal periodic payments for the recipient's life expectancy or a term of at least 10 years, or is a payment received after termination of employment under an excess-benefit plan. Both the SERP (paid for life) and the Deferred Compensation Plan (paid over a 12-year term) met this test, so payments under them would have been nontaxable retirement income if WMB had never gone bankrupt.

Citing Hort v. Commissioner, 313 U.S. 28 (1941), the Department reasoned that a settlement payment received in place of another item of income takes on the same tax character as the item it replaces. Because WMB's unforeseeable bankruptcy - not any choice by Petitioner - forced the SERP and Deferred Compensation Plan obligations into a single lump-sum settlement, that change in form did not change the underlying retirement-income character of the payment. The Department therefore ruled that the lump sum is treated as nontaxable retirement income of a nonresident under 4 U.S.C. § 114(b)(1)(ii).

What this means for you

Nonresidents whose deferred-comp plan is settled in a lump sum

If you are a nonresident of New York receiving payments from a nonqualified deferred compensation or supplemental retirement plan that would otherwise qualify as exempt "retirement income" under 4 U.S.C. § 114, an involuntary event such as your former employer's bankruptcy that converts those payments into a single lump sum does not, by itself, make the money New York-taxable. The key question is whether the underlying plan payments would have qualified as retirement income had they continued as originally structured.

Employers and plan administrators handling bankruptcy-driven payouts

When a bankruptcy or corporate restructuring forces a successor entity to settle deferred compensation obligations in a lump sum, withholding New York tax by default (as JPMorgan Chase did here) may not reflect the correct tax treatment for a nonresident participant. Documenting the original plan's periodic-payment structure and term can matter later if the recipient seeks a refund or advisory opinion.

Common questions

Q: Does converting periodic retirement payments into a lump sum change how New York taxes a nonresident's benefits?
A: Not under this ruling. Citing Hort v. Commissioner, the Department held that a settlement payment takes on the same tax character as the payments it replaces, so a bankruptcy-forced lump sum of otherwise-exempt retirement income remains exempt.

Q: What made the SERP and Deferred Compensation Plan payments "retirement income" under federal law in the first place?
A: Both were nonqualified deferred compensation plans under IRC § 3121(v)(2)(C), and both paid out in substantially equal periodic installments - the SERP for Petitioner's life, and the Deferred Compensation Plan over a 12-year term - satisfying 4 U.S.C. § 114(b)(1)'s definition of retirement income.

Q: Why did JPMorgan Chase withhold New York tax if the payment was ultimately ruled exempt?
A: The ruling doesn't say why withholding occurred, only that JPMorgan Chase withheld an amount equal to New York State and local estimated income tax from the May 2012 distribution; the Advisory Opinion addresses the correct tax treatment, not the withholding decision itself.

Q: Does 4 U.S.C. § 114 protect this kind of income for New York residents too?
A: No. The federal preemption in 4 U.S.C. § 114(a) applies only to an individual who is not a resident or domiciliary of the taxing state; it does not limit New York's ability to tax its own residents' retirement income.

Citations and references

• 4 U.S.C. § 114(a) (Pub. L. 104-95) - bars a state from taxing the retirement income of an individual who is not a resident or domiciliary of that state, for amounts received after December 31, 1995
• 4 U.S.C. § 114(b)(1) - defines "retirement income" to include payments from an IRC § 3121(v)(2)(C) nonqualified deferred compensation plan made as substantially equal periodic payments over a life expectancy or a term of at least 10 years
• IRC § 3121(v)(2)(C) - defines a "nonqualified deferred compensation plan"
• Hort v. Commissioner, 313 U.S. 28 (1941) - a settlement payment is characterized for tax purposes by the nature of the item it replaces
• TSB-A-97(9)I - prior advisory opinion cited in support of the settlement/character analysis

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a13_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(5)I
Income Tax
April 8, 2013

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I120515A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether a lump sum settlement received by a
nonresident from a nonqualified supplemental employee retirement plan (“SERP”) and Deferred
Compensation Plan pursuant to an order of bankruptcy is exempt from New York State personal
income tax.
We conclude that, for New York State personal income tax purposes, the lump sum
payment received by a nonresident in settlement of his SERP and Deferred Compensation Plan is
treated as nontaxable retirement income.
Facts
Petitioner submits the following facts in connection with his Petition. Petitioner is a
nonresident of New York. In January 2002, Washington Mutual Bank (“WMB”) acquired Dime
Savings Bank of New York (“Dime”). Dime was a New York corporation headquartered in
New York City. Petitioner was an executive vice president with Dime at the time of the
acquisition and did not continue employment with WMB, and instead, accepted retirement.
Petitioner was a participant in Dime’s SERP and its Deferred Compensation Plan. In March,
2002, Petitioner turned 55 and began receiving monthly payments under the SERP. In 2003,
Petitioner began receiving quarterly payments under the Deferred Compensation Plan. The
payments under the SERP were in a fixed amount for life and the quarterly payments under the
Deferred Compensation Plan varied on the basis of the earnings from the assets in the account
for a term of 12 years. Petitioner further asserts that both plans constituted “nonqualified
deferred compensation plans” pursuant to IRC §3121(v)(2)(C).1
In 2008, WMB filed a voluntary petition in Bankruptcy Court in Delaware, was seized by
the FDIC and its assets were sold to JPMorgan Chase. Pursuant to a Global Settlement
Agreement, JPMorgan Chase undertook certain obligations with respect to the SERP and the
Deferred Compensation Plan. The Global Settlement Agreement specified that JPMorgan Chase
was not required to assume any “nonqualified deferred compensation plan” but was required to
“satisfy the obligations to pay or provide any and all benefits with respect to the arrangements”
in those plans. JPMorgan Chase was expressly authorized “to the extent of applicable laws,
change the manner and form of those payments.”
1

Petitioner has submitted correspondence from the Trustee of both plans confirming that both plans constitute
nonqualified deferred compensation plans.

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TSB-A-13(5)I
Income Tax
April 8, 2013

In May, 2012, JPMorgan Chase disbursed to Petitioner a lump sum distribution that
represented the present value of the SERP annuity, the balance in the Deferred Compensation
Plan, and interest during the period of bankruptcy when payments were suspended. JPMorgan
Chase withheld from the distribution an amount equal to New York State and local estimated
income tax. Petitioner has resided in both New Jersey and Virginia and currently resides in
Pennsylvania, but has never been a resident of New York.
Analysis
Section 114(a) of Title 4 of the US Code, as added by Public Law 104-95, January 10,
1996, and applicable to amounts received after December 31, 1995, provides that “[no] State
may impose an income tax on any retirement income of an individual who is not a resident or
domiciliary of such State (as determined under the laws of such State).” Section 114(b)(1) of
Title 4 of the US Code defines the term “retirement income” as any income from, among other
things: “(1) [a]ny plan, program or arrangement described in Internal Revenue Code section
3121(v)(2)(C), if such income (i) is part of a series of substantially equal periodic payments,2 or
(ii) is a payment received after termination of employment and under a plan, program or
arrangement (to which such employment relates) maintained solely for the purpose of providing
retirement benefits for employees in excess of the limitations imposed by one or more sections
401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k), or 415 of such Code or any other limitation
on contributions or benefits in such Code on plans to which any of such sections apply.”
Pursuant to section 114 of Title 4 of the US Code, New York may not impose personal
income tax on the retirement income of a nonresident or a nondomiciliary individual after
December 31, 1995. “Retirement income” under 4 U.S.C. §114(b)(1)(I) means any plan,
program or arrangement described in IRC §3121(v)(2)(C), if such income is part of a series of
substantially equal periodic payments (not less frequently than annually) made for (i) the life
expectancy of the recipient, or (ii) a period of not less than 10 years.3 A “nonqualified deferred
compensation plan” is defined in IRC §3121(v)(2)(C) as any plan or other arrangement for the
deferral of compensation other than a plan described in IRC § 3121(a)(5) (generally, ERISA or
“qualified” plans). Under the facts submitted by the Petitioner, both the SERP and the Deferred
Compensation Plan were arrangements described in §3121(v)(2)(C) of the Code and payments
made under those plans would have constituted nontaxable retirement income pursuant to 4
U.S.C. §114 had WMB not commenced bankruptcy proceedings.
The fact that the WMB bankruptcy proceeding caused Petitioner to accept a lump sum
payment in settlement of payments that constituted retirement income under 4 U.S.C. §114 does
not change the tax characterization of the payment. See Hort v. Commissioner, 313 U.S. 28
2

The slight variation of the SERP amounts do not cause that plan to fail the IRC retirement income test. “The fact
that payments may be adjusted from time to time pursuant to such plan, program, or arrangement to limit total
disbursements under a predetermined formula, or to provide cost of living or similar adjustments, will not
cause the periodic payments provided under such plan, program, or arrangement to fail the ‘substantially equal
periodic payments’ test.” (4 USC §114(b)(I)(ii)).
3
Petitioner has confirmed that the term of the SERP was for life and the Deferred Compensation Plan was for a
period of twelve years.

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TSB-A-13(5)I
Income Tax
April 8, 2013

(1941), where the Supreme Court of the United States held that, in order to determine the nature
and extent to which settlement amounts received by compromise or judgment are to be included
in gross income, it is necessary to look to the nature of the item for which the settlement is a
substitute. That is, the settlement amount received should be treated the same as the underlying
item that was the basis for the settlement. The unforeseeable act of WMB filing for bankruptcy
should not change the tax treatment of Petitioner’s SERP or Deferred Compensation Plan. See
Hort, supra; see also TSB-A-97(9)I.
Accordingly, we conclude that, for New York State and local personal income tax
purposes, the lump sum payment received by the Petitioner in settlement of his SERP and
Deferred Compensation Plan with WMB will be treated as nontaxable retirement income of a
person who is not a resident or domiciliary under section 114(b)(1)(ii) of the US Code.

DATED: April 8, 2013

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.