Are nonqualified deferred-compensation distributions paid to a nonresident in installments over 10 years 'retirement income' exempt from New York tax and withholding?

Plain-English summary

A retiree who lived outside New York during and after his New York employment received installment payments over a 10-year period from his former employer's nonqualified deferred-compensation plans. He asked whether they are "retirement income" exempt under the federal Pension Source Law and, if so, whether they are subject to New York withholding.

The Office of Counsel concluded yes, exempt, and no withholding. Under 4 USC § 114(b)(1)(I), "retirement income" includes nonqualified deferred comp (IRC § 3121(v)(2)(C)) paid as a series of substantially equal periodic payments over at least 10 years. Because the taxpayer elected quarterly installments over 10 years, the payments qualify, 4 USC § 114 bars New York from taxing a nonresident on them, and therefore Tax Law § 671(a) withholding does not apply.

What this means for you

Retirees who leave New York with deferred compensation

Structuring the payout as a level stream of at least 10 years can shield it from New York tax once you've moved away - the federal Pension Source Law protects qualifying retirement income of nonresidents. (Lump sums are analyzed separately; see TSB-A-16(1)I and TSB-A-16(3)I.)

Employers and payroll teams

If a former employee is a nonresident and the deferred-comp payments meet the 10-year (or life-expectancy) test under 4 USC § 114(b)(1)(I), don't withhold New York tax - the income isn't New York-taxable.

Common questions

Q: What makes deferred comp 'retirement income' under federal law?
A: Among other things, payment as substantially equal periodic payments over the recipient's life/life expectancy or a period of at least 10 years.

Q: Should my old employer still withhold New York tax?
A: No, if the payments qualify and you're a nonresident - they aren't subject to New York tax or § 671(a) withholding.

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 § 671(a); 20 NYCRR 171.1
- 4 USC § 114(a), (b)(1)(I); IRC § 3121(v)(2)(C)

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_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

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

TSB-A-16(4)I
Income Tax
April 29, 2016

PETITION NO - I150120A

The Department of Taxation and Finance (“Department”) received a Petition for
Advisory Opinion from REDACTEDREDACTED (“Petitioner”). Petitioner, asks whether
distributions under a nonqualified deferred compensation plan qualify as “retirement income”
under 4 U.S.C.S. § 114(b)(1)(I) and, if so, whether the distributions are subject to New York
State income tax withholding.
We conclude that the payments conform to the definition of “retirement income” under 4
U.S.C.S. § 114(b)(1)(I), and are not subject to New York State income tax withholding.
Facts
Petitioner participated in several nonqualified deferred compensation plans during his
employment in New York. The plans provided retirement, disability and termination benefits
for participating employees, and a death benefit payable prior to termination. During his
employment, Petitioner was allowed to designate one of three forms of payment from each plan
to be paid after separation from service. For some of the plans, 1 Petitioner elected to receive
payments in quarterly installments over a 10-year period. Once a form of payment was chosen,
Petitioner entered into a Participation Agreement with his employer that contractually locked in
the choice. Under certain circumstances prior to retirement, Petitioner was allowed to change
his payment form designation, but the election was irrevocable after retirement. Petitioner was
domiciled and resided outside of New York during and after his employment. After retiring,
Petitioner began receiving distributions from the nonqualified deferred compensation plans.
Petitioner states these payments are reportable on Form W-2.
Analysis
Tax Law § 671(a) and New York tax regulation 20 NYCRR § 171.1 require that every
employer maintaining an office or transacting business within New York State and making
payment of any wages taxable under the personal income tax, must deduct and withhold from the
employee’s wages an amount of tax substantially equivalent to the New York State personal
income tax reasonably estimated to be due resulting from the inclusion in the employee’s New
York adjusted gross income or New York source income of his or her wages received during the
calendar year.
Section 114(a) of Title 4 of the U.S. Code 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.
“Retirement income” under 4 U.S.C. § 114(b)(1)(I) means any plan, program, or arrangement
1

For plans where Petitioner received a lump sum distribution after retirement, Petitioner states that he filed a New
York State Nonresident Income Tax Return and paid the tax due. He is not asking for an opinion on these lump sum
distributions.

-2-

TSB-A-16(4)I
Income Tax
April 29, 2016

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 or life expectancy of
the recipient or (ii) a period of not less than 10 years.
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).
It must be determined therefore, if the income from Petitioner’s Plan is part of a series of
substantially equal periodic payments (not less frequently than annually) made for the life or life
expectancy of the recipient or for a period of not less than 10 years. In this case, Petitioner
elected in participation agreements with his employer to take annual distributions from the Plan
as part of a series of quarterly installment payments over a 10-year period.
Assuming
Petitioner’s plan is a “nonqualified plan” as described in IRC § 3121(v)(2)(C), the payments
would qualify as “retirement income” under 4 U.S.C. § 114(b)(1)(I) and, therefore, would not be
subject to New York State income tax. Also, since the payments would not be subject to New
York State income tax, such payments would not be subject to withholding tax under Tax Law §
671(a).

DATED: April 29, 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.