Must a nonresident include in New York source income a lump-sum distribution from an excess-benefit nonqualified deferred-compensation plan earned while working in New York?

Plain-English summary

A taxpayer whose compensation exceeded the IRC § 401(a)(17) limit had part of his retirement benefit accrue under a nonqualified "excess benefit plan." He later moved out of New York, and at retirement his former New York employer paid him a lump sum from the plan but withheld New York tax (on the theory that deferred comp is taxed where earned). He asked, as a nonresident, whether he had to include it as New York source income.

The Office of Counsel concluded no. 4 USC § 114(a) bars a state from taxing the retirement income of a nonresident. Under 4 USC § 114(b)(1)(I), that includes income from a nonqualified plan (IRC § 3121(v)(2)(C)) paid after termination under a plan maintained solely to provide retirement benefits above the § 401(a)(17) limits - exactly this excess benefit plan. So the lump sum is not subject to New York tax.

What this means for you

Former New York employees who moved away

An employer's reflexive withholding ("taxed where earned") can be wrong. Excess-benefit-plan payments to a nonresident, made after termination, are protected retirement income under federal law - even paid as a lump sum. If New York tax was withheld, you can seek a refund.

Accountants and tax preparers

Confirm the plan is a § 3121(v)(2)(C) nonqualified plan maintained solely for benefits above the § 401(a)(17) cap, paid after termination, and that the client was a nonresident when paid. Those facts trigger the 4 USC § 114 shield.

Common questions

Q: My old employer withheld New York tax on my excess-benefit lump sum - is that right? A: Not if you were a nonresident when paid. Federal law protects this retirement income; you can pursue a refund.

Q: Does it matter that I earned it while working in New York? A: No. The Pension Source Law protects qualifying retirement income of nonresidents regardless of where earned.

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:

• 4 U.S.C. § 114(a), (b)(1)(I); IRC §§ 3121(v)(2)(C), 401(a)(17)
• NYS Publication 36 (Senior Citizens and Retired Persons)

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_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(3)I
Income Tax
April 22, 2016

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

PETITION NO. I150420B

The Department of Taxation and Finance received a Petition for Advisory Opinion from REDACTED, residing at REDACTEDREDACTED. Petitioner asks whether, as a nonresident of New York, he must include lump-sum distributions from a nonqualified deferred compensation plan as New York source income. We conclude that a lump sum distribution from a nonqualified deferred compensation plan to Petitioner as a New York nonresident is not subject to New York State income tax pursuant to 4 U.S.C. § 114. Facts Petitioner worked for a New York employer (“Employer”) who offered a qualified retirement plan under IRC § 401(a). However, as an employee whose annual compensation exceeded the statutory limits under IRC § 401(a)(17), part of his retirement benefit accrued under a nonqualified deferred compensation plan, commonly known as an excess benefit plan (“Excess Benefit Plan”). Petitioner subsequently established residence outside New York State. At retirement, the Employer made a lump sum distribution from the Excess Benefit Plan to Petitioner, but withheld New York taxes pursuant to its policy that lump sum distributions from deferred compensation plans are subject to income tax in the state where the compensation was earned. Petitioner did not maintain a residence in New York at the time the lump sum distribution from the Excess Benefit Plan was made. Analysis Section 114 of Title 4 of the United States Code prohibits any state from imposing income tax on the retirement income of an individual who is not a resident or domiciliary of that state. 4 U.S.C. § 114(a). Included within the definition of retirement income subject to this prohibition is income from any plan, program, or arrangement described in IRC § 3121(v)(2)(C), which describes nonqualified deferred compensation plans, 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 imposed by IRC § 401(a)(17), inter alia. 4 U.S.C. § 114(b)(I); see also New York State Department of Taxation and Finance Publication 36, General Information for Senior Citizens and Retired Persons (3/15). In this case, Petitioner received a lump sum distribution from a nonqualified plan described under 4 U.S.C. § 114 after establishing residency outside New York State. Petitioner

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TSB-A-16(3)I
Income Tax
April 22, 2016

was not a resident of New York at the time of the distribution from the Excess Benefit Plan. As such, the lump sum distribution from the Excess Benefit Plan is not subject to New York personal income tax.

DATED: April 22, 2016
/S/
DEBORAH R. LIEBMAN
Deputy Counsel

NOTE:

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.