Is a lump-sum payment from a former employer's 401(k) restoration plan, distributed after the taxpayer retired and left New York, exempt from New York State and City tax?
Plain-English summary
A retiree contributed to his employer's 401(k) Plan and an unfunded, nonqualified "401(k) Restoration Plan" (for highly compensated employees, above the IRC § 401(a)(17) limit). He retired in August 2014, moved out of New York at year-end, and in 2015 received a lump sum from the Restoration Plan. He asked whether it is exempt from New York State and City tax.
The Office of Counsel concluded yes, on two independent grounds:
- Federal Pension Source Law (4 USC § 114): the Restoration Plan is a nonqualified deferred-comp plan (IRC § 3121(v)(2)(C)) maintained solely for benefits above the § 401(a)(17) limit; a nonresident's distribution is protected retirement income.
- No New York accrual (Tax Law § 639): the account was unfunded and the amount kept fluctuating, so he had no fixed right to a determinable amount until 2015, after he left New York. Nothing accrued to his resident period.
What this means for you
Highly compensated employees retiring out of New York
"Restoration" or "excess benefit" plan payouts received after you move away are generally beyond New York's reach - both because federal law protects them and because, with an unfunded account that fluctuates until payment, the income didn't accrue while you were a resident.
Accountants and tax preparers
Two shields apply: the 4 USC § 114 retirement-income test, and the § 639 accrual ("all events"/fixed-and-determinable) analysis. An unfunded, contingent, fluctuating account supports the no-accrual conclusion. (Compare the deferred-comp opinions TSB-A-16(3)I, 16(4)I, 20(12)I.)
Common questions
Q: Is a lump sum treated worse than installments?
A: Not here. Even a lump sum is protected because the taxpayer was a nonresident and the income didn't accrue before the move.
Q: What made it 'not accrued' in New York?
A: The account was unfunded and its value kept changing until payment, so no fixed, determinable right existed before he left.
Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.
Citations and references
Statutes and regulations:
- Tax Law §§ 639(a), 605(b)(1)(A)(i)
- 4 USC § 114(a), (b)(1)(I); IRC §§ 3121(v)(2)(C), 401(a)(17)
- Treas. Reg. § 1.446-1; Matter of Blanco v. Commissioner
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2016.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a16_1i.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-16(1)I
Income Tax
March 15, 2016
Office of Counsel
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. I150204A
The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTED. Petitioner asks whether a
lump sum payment to be distributed to Petitioner in 2015 from his former employer’s 401(k)
Restoration Plan will be exempt from New York State and City personal income tax.
We conclude that the distribution will not be subject to New York State and City personal
income tax.
Facts
In August 2014, Petitioner retired from a corporation (“the Corporation”) where he had
been employed since 1998. From the time he was first employed by the Corporation until
December 31, 2014, Petitioner was a resident of New York State and City. On December 30,
2014, Petitioner turned in the keys to the New York City apartment that he had been renting and
moved to another state, where he now resides. For purpose of this advice, we will assume that
Petitioner will meet all the requirements to be considered a nonresident of New York State under
Tax Law §605(b)(1)(A)(i) for the entirety of the 2015 tax year.
While he was employed at the Corporation, Petitioner deferred a portion of his income
into the Corporation’s 401(k) Plan (the “401(k) Plan”), a qualified retirement plan. In addition to
the 401(k) Plan, Petitioner also contributed to the Corporation 401(k) Restoration Plan (the
“Restoration Plan”), a nonqualified retirement plan designed to provide supplemental retirement
benefits to highly compensated employees. Only employees whose annual base salary equaled
or exceeded $200,000 (adjusted for the cost of living) were eligible to participate in the
Restoration Plan. See Internal Revenue Code (IRC) § 401(a)(17). Only after he reached the
maximum contribution limit for the 401(k) Plan would Petitioner be permitted to elect to defer
portions of his salary and bonus compensation, and contribute those portions to the Restoration
Plan. See §2.3(b) of the Restoration Plan.
The Restoration Plan is unfunded and intended to constitute an incentive and deferred
compensation plan for a select group of officers and key management employees. The employee
accounts established and maintained under the Restoration Plan are for accounting purposes only
and shall not be deemed or construed to create a trust fund of any kind or to grant a property
interest of any kind to any associate, beneficiary, or estate. Although each employee that
participates in the plan designates the investment vehicle(s) in which his or her account shall be
deemed to be invested, the Corporation is under no obligation to acquire or invest in any of the
deemed investment vehicle(s), and any acquisition of or investment in a deemed investment
vehicle(s) shall be made in the name of the Corporation and remain the sole property of the
Corporation. Each employee’s account is adjusted at regular intervals to reflect the amount the
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March 15, 2016
employee would have earned or lost if the account had actually been invested in the investment
vehicles selected. All contributions to the employees’ accounts become fully vested on the date
that they are made.
An employee may select the form of distributions (typically after retirement) applicable
to each set of class year deferrals. Petitioner selected payment of a lump sum following
termination of employment. As such, the distribution was payable as a lump sum within 90 days
following the end of the Restoration Plan year in which his employment was terminated. During
the period between termination and payment, an employee’s account continued to fluctuate,
based on the change in value of the deemed investments in the account as elected by the
employee.
Analysis
Title 4 of the United States Code (USC) § 114(a) 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. The term “retirement income” means any income from qualified plans, including IRC
§ 401(k) plans. See 4 USC §114(b)(1)(A)-(H). It also means nonqualified deferred
compensation plans described in IRC § 3121(v)(2)(C) or any plan, program, or arrangement that
is in writing, that provides for retirement payments in recognition of prior service to be made to a
retired partner, and that is in effect immediately before retirement begins, if such income 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 set forth in various sections of the IRC
applicable to certain qualified plans, including §§ 401(a)(17) and 401(k). See 4 USC §
114(b)(1)(I)(ii). IRC § 3121(v)(2)(C) defines a “nonqualified deferred compensation plan” as
any plan or other arrangement for deferral of compensation other than a plan described in IRC §
3121(a)(5) (generally ERISA or “qualified” plans).
The Restoration Plan is a nonqualified deferred compensation plan or arrangement
described in IRC § 3121(v)(2)(C), and the lump sum distribution from the Restoration Plan
meets the requirements of 4 USC § 114(b)(1)(I)(ii). The Restoration Plan is maintained solely
for the purpose of providing supplemental retirement benefits after the termination of
employment for the Corporation’s employees earning in excess of compensation limitations
under IRC § 401(a)(17), applicable to the Corporation’s § 401(k) plan or other qualified plans.
Assuming Petitioner is a nonresident of New York at the time he receives the lump sum payment
from the Restoration Plan, 4 USC § 114 prevents New York from taxing the payment because
the distribution qualifies as “retirement income” covered under the federal statute.
Under Tax Law § 639(a), individuals who change their status from New York resident to
nonresident are put on the accrual method of accounting and are required to accrue to their
resident period any items of income, gain, loss or deduction accruing to them prior to their
change of residency. In determining when an item of income accrues for this purpose, the New
York courts and the Department have generally relied on Federal law, specifically the “all
events” test expressed in Treas. Reg. § 1.446-1(c)(ii)(A). As summarized by the Appellate
Division, “[u]nder an accrual method, income is to be included for the taxable year when all the
events have occurred that fix the right to receive the income and the amount of the income can
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March 15, 2016
be determined with reasonable accuracy.” See Matter of Blanco v. Commissioner, 282 A.D.2d
896 (3rd Dep’t 2001), lv. denied, 96 N.Y.2d 719 (2001). The Department’s Publication 88,
addressing accruals, notes: “If you had a right to receive income without restrictions or
contingencies at or before the date of the change in residence, this income would be accruable at
the time you changed your residence, even if the income is actually received after you move out
of New York State.” See Department of Taxation and Finance Publication 88, General
Information for New York State Nonresidents and Part Year Residents, page 15. The
instructions to the Department’s Form IT-225-I mirror Treas. Reg. § 1.446-1 and state that
income accrues when the right to receive income is fixed and the amount becomes fixed and
determinable. Form IT-225-I, Addition Modification A-115, page 5.
Until 2015, when Petitioner was no longer a resident of New York, he had no fixed right
to receive any amount of income from his account in the Restoration Plan. Prior to 2015,
Petitioner’s account established and maintained under the Restoration Plan was unfunded and for
accounting purposes only. The account was not deemed or construed to create a trust fund of
any kind or to grant a property interest of any kind to Petitioner. Although Petitioner could
designate the investment vehicle(s) in which his account was deemed to be invested, the
Corporation was under no obligation to acquire or invest in any of the deemed investment
vehicle(s). Any acquisition of or investment in a deemed investment vehicle(s) was made in the
name of the Corporation, which remained the sole owner of the investment. Petitioner elected to
take his distribution in a single lump sum payment following termination of his employment.
The Restoration Plan provided that a lump sum payment following termination of employment
must be paid in a single cash payment within 90 days following the end of the plan year in which
the termination of employment occurred. Petitioner terminated his employment in August 2014.
Thus, payment from Petitioner’s account in the Restoration Plan was required to be distributed
within 90 days following the end 2014, when Petitioner was no longer a resident of New York
State.
Likewise, the amount of Petitioner’s account could not be determined with reasonable
accuracy prior to 2015. Participant’s account was adjusted at regular intervals to reflect the
amount he would have earned or lost if the account had actually been invested in the investment
vehicles he selected, and Petitioner remained eligible to elect from among the available deemed
investments through the last business day immediately preceding the payment date. Thus,
although Petitioner’s account in the Restoration Plan was fully vested, the amount of the account
continued to change until the proceeds were distributed.
Because all the events that fixed Petitioner’s right to receive the income from the
Restoration Plan and the amount of Petitioner’s income from the Plan could only be determined
with reasonable accuracy after 2014, we conclude that Petitioner is not subject to New York
State or City income tax on distributions from this account in 2015.
DATED: March 15, 2016
/S/
DEBORAH R. LIEBMAN
Deputy Counsel
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NOTE:
TSB-A-16(1)I
Income Tax
March 15, 2016
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.