Do installment payments from a nonqualified supplemental retirement plan, received after age 59 1/2 and after retiring, qualify as 'pensions and annuities' for New York's $20,000 income subtraction?

Plain-English summary

Petitioner worked for American Express from 1984 until August 2007, when he retired at age 56. As an employee, he participated in the American Express Retirement Restoration Plan (formerly the Supplemental Retirement Plan), a nonqualified deferred compensation plan for federal income tax purposes. In October 2005, while still employed, he elected to receive his supplemental retirement benefits in fifteen annual installments. The first installment was paid in July 2008, after his retirement. In July 2011 - by which time Petitioner had turned 59½ - he received an installment of $23,394.60, which his former employer reported on IRS Form W-2, Box 1 (wages) and Box 11 (nonqualified plans).

Petitioner asked whether these post-59½ installment payments qualify as "pensions and annuities" eligible for New York's $20,000 income subtraction under Tax Law § 612(c)(3-a).

The Department explained that a taxpayer's New York adjusted gross income starts from federal adjusted gross income (FAGI). Under IRC § 61(a)(1) and 26 CFR § 1.61-2(a)(1), gross income includes compensation for services, including pensions and retired pay - so the Plan distributions are part of FAGI and taxable unless a New York subtraction applies. Tax Law § 612(c)(3-a) allows a subtraction of up to $20,000 for compensation included in FAGI if the recipient (1) has reached age 59½, (2) receives the money in periodic payments, and (3) the money is attributable to personal services the recipient performed for the employer before retirement.

Applying those three requirements, the Department found that the payments at issue (received after July 2011 and after Petitioner turned 59½) were paid only after his separation from service, were paid annually each July, and were attributable to services performed before his 2007 retirement. The Department concluded the Plan distributions therefore constitute "pensions and annuities" within the meaning of § 612(c)(3-a) and are eligible for the subtraction, up to $20,000, regardless of the fact that the employer reported the payments as W-2 wages - citing its own prior opinion, TSB-A-10(1)I, for that same conclusion.

What this means for you

Retirees receiving nonqualified deferred compensation installments

If you retired and are receiving installment payments from a nonqualified deferred compensation or supplemental retirement plan tied to your former employment, those payments can still qualify as "pensions and annuities" for the § 612(c)(3-a) subtraction once you've turned 59½ and are no longer employed by the payer - even if the plan is not a qualified pension plan and even if the payments are periodic installments elected years in advance rather than a lifetime annuity.

Don't be thrown off by how the payment is reported on Form W-2

The Department confirmed that an employer's decision to report deferred compensation payments as wages on Form W-2 (Boxes 1 and 11), rather than on a 1099-R, does not by itself disqualify the payments from the pension and annuity subtraction. What matters is whether the payment meets the statutory test - age 59½, periodic payment, and attributable to pre-retirement personal services - not how it happens to be reported.

Common questions

Q: Does it matter that the employer reported the payments as wages on Form W-2 instead of as a pension distribution?
A: No. The Department specifically held that the employer's reporting of the payments as wages does not change the conclusion that they qualify as pension income under Tax Law § 612(c)(3-a).

Q: What made these installment payments "periodic payments attributable to personal services... prior to retirement"?
A: The payments were elected years before retirement (in 2005), were paid in fixed annual installments (every July) only after Petitioner's 2007 separation from employment, and related to services he performed for his employer before he retired - matching the requirements of § 612(c)(3-a) and 20 NYCRR § 112.3(c)(2)(i)(a-d).

Q: Is the entire $23,394.60 installment payment excluded from New York tax?
A: No. Tax Law § 612(c)(3-a) caps the subtraction at $20,000 per year; only up to that amount of otherwise-taxable pension income can be subtracted, and any excess remains taxable.

Q: Does this ruling apply only to nonqualified deferred compensation plans, or to pensions generally?
A: The ruling addresses a nonqualified deferred compensation plan specifically, but its reasoning turns on the general three-part test in § 612(c)(3-a) (age 59½, periodic payment, pre-retirement personal services) - the same test that applies to pension and annuity income generally.

Q: What if the payments had been received before the recipient turned 59½?
A: The ruling only addresses payments received after Petitioner attained age 59½; § 612(c)(3-a) by its terms requires the recipient to have reached that age for the subtraction to apply.

Citations and references

• Tax Law § 612(c)(3-a) - subtraction of up to $20,000 for pension and annuity income of individuals age 59½ or older, for periodic payments attributable to pre-retirement personal services arising from an employer-employee relationship
• 20 NYCRR § 112.3(c)(2)(i)(a-d) - regulations implementing the § 612(c)(3-a) subtraction
• IRC § 61(a)(1) - gross income includes compensation for services
• 26 CFR § 1.61-2(a)(1) - Treasury regulation interpreting gross income to include retired pay, pensions, and retirement allowances
• IRC § 62 - computation of federal adjusted gross income
• TSB-A-10(1)I - prior Department opinion holding that W-2 reporting of a payment as wages does not preclude its treatment as pension income

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_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(7)I
Income Tax
May 23, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I120409A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether certain supplemental retirement benefits
received after the age of 59 ½ (“Plan Distributions”) and after separation from employment
constitute “pensions and annuities” and therefore qualify for the $20,000 income subtraction
pursuant to Tax Law section 612(c)(3-a).
We conclude that, because the Plan distributions qualify as pension income, the $20,000
income subtraction under Tax Law section 612(c)(3-a) is allowable.
Facts
Petitioner submits the following facts in connection with his Petition: Petitioner was
employed by American Express Company (“Employer”) from 1984 to August 2007, when he
retired at the age of 56. Petitioner was a participant in the American Express Retirement
Restoration Plan, formerly known as the Supplemental Retirement Plan (the “Plan”). The
Petition submitted by Petitioner confirms that the Plan is a nonqualified deferred compensation
plan for Federal income tax purposes. In October 2005, Petitioner elected to receive his
supplemental retirement benefits from the Plan in fifteen annual installments. Petitioner retired
in August of 2007. The first installment payment under the plan was made in July, 2008.
In July, 2011 (and after Petitioner had turned 59½ ), the installment payment received
pursuant to the Plan equaled $23,394.60. This payment was reported by Employer on IRS Form
W-2 Box 1 (Wages, Tips or Other Compensation) and Box 11 (Non-Qualified Plans). Petitioner
requests confirmation of the New York tax treatment of amounts received under the Plan
following the date on which he turned 59 ½.
Analysis
Section 612 of the Tax Law provides that the New York adjusted gross income of a
resident individual is the individual’s Federal adjusted gross income (“FAGI”) with the
modifications specified in section 612. Up to $20,000 of income that is included in FAGI due to
distributions from pensions and annuities that are not subject to the subtraction modifications
provided by Tax Law section 612(c)(3) (and not relevant to the facts here) are eligible for the
subtraction modification provided by Tax Law section 612(c)(3-a) if the taxpayer is at least 59½,
the distributions are “periodic payments attributable to personal services performed by such

-2-

TSB-A-13(7)I
Income Tax
May 23, 2013

individual prior to his retirement from employment and which arise from an employer-employee
relationship.” (Tax Law §612[c][3-a]). (See also Regulations 20 NYCRR §112.3(c)(2)(i)(a-d)).
An individual’s FAGI is computed by calculating federal gross income less federal
deductions (Internal Revenue Code §62).
Under the IRC, gross income includes
“[c]ompensation for services, including fees, commissions, fringe benefits, and similar items.”
(IRC §61[a][1]). The Treasury Regulations interpret IRC section 61(a)(1) to include, among
other things, wages, “retired pay of employees, pensions, and retirement allowances.” (See, 26
CFR §1.61-2[a][1]). Thus, although not wages, the Plan distributions are part of FAGI and are
taxable unless subject to a New York subtraction modification.
Section 612(c)(3-a) provides a subtraction modification of up to $20,000 for
compensation included in FAGI if (1) the recipient has attained the age of fifty-nine and onehalf, (2) the money is paid in periodic payments, and (3) the money is attributable to personal
services performed by the recipient for his or her employer prior to retirement. Since the
amounts subject to this inquiry (i.e., payments received after July, 2011 and after the date on
which Petitioner attained the age of 59 ½ ) were only paid after Petitioner’s separation from
service to Employer and are paid to Petitioner annually in the month of July, the distributions
received by Petitioner from the Plan constitute “pensions and annuities” income within the
purview of Tax Law §612(c)(3-a). As such, these payments are eligible for the subtraction
modification afforded by that section in an amount not to exceed $20,000. The fact that the
employer reported the payments as wages does not change this conclusion. See TSB-A-10(1)I.

DATED: May 23, 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.