New York Advisory Opinion TSB-A-85 (2)I: Do payments from an employer's long-term disability income plan qualify for New York's age-59½ pension/annuity exclusion under section 612(c)(3-a)?

Plain-English summary

Richard J. Alexanderson became eligible for his employer C.P.C. International's employer-funded long-term disability plan in 1981 after becoming permanently disabled, and turned 59½ in 1982. He asked whether his disability plan payments qualify for New York's section 612(c)(3-a) exclusion, which shelters a portion of "pensions and annuities" received by someone 59½ or older whose payments are attributable to pre-retirement personal services under an employer-employee relationship.

The Department first checked whether the payments were a "pension." Under Internal Revenue Code § 401 and its regulations, a qualified pension plan systematically pays definitely determinable benefits based on service and compensation, and excludes benefits like sickness, accident, or disability payments that aren't customarily part of a pension plan. Because the C.P.C. International disability plan didn't meet that federal qualified-pension-plan standard, the payments didn't qualify as a "pension" for section 612(c)(3-a) purposes.

The Department then turned to whether the payments qualified as an "annuity" instead. Under the version of 20 NYCRR § 131.4(d)(2) in effect before March 16, 1983, an annuity had to be payable at a uniform rate (with only limited exceptions), and the disability plan's payment structure (75% of salary initially, later reduced) didn't fit that mold. But an amendment adopted March 16, 1983 - retroactively effective for taxable years ending on or after December 16, 1982 - broadened the definition to also cover payments whose total amount is determinable at the "annuity starting date" using mortality tables or actuarial calculations. Under that amended standard, the Department found the disability payments qualified: they're part of a single cohesive retirement scheme (disability payments feeding into regular retirement payments once the disability period ends), paid in money at regular monthly intervals, with a determinable total based on objective factors like service and compensation, under a definite written plan distributed to employees.

Accordingly, the Department concluded the payments qualify as an "annuity" - but only for those received during taxable years ending on or after December 16, 1982, and only to the extent Alexanderson had already reached age 59½ when he received them.

What this means for you

Employees receiving employer-funded long-term disability payments who are 59½ or older

Don't assume disability payments are automatically excluded as a "pension" - they typically aren't, unless the plan itself is a qualified federal pension plan. But they can still qualify as an "annuity" under the post-1982 regulatory definition if the plan is a cohesive part of your overall retirement scheme, paid in money at regular intervals with a determinable total amount.

Employers structuring disability plans that feed into a retirement plan

Structuring disability benefits so they transition into a regular retirement plan (rather than standing alone) supports treating the combined arrangement as a "retirement benefit" for purposes of the amended annuity definition - which matters for whether your employees at or over 59½ can exclude a portion under section 612(c)(3-a).

Accountants preparing returns for disabled retirees receiving employer disability income

Check the date the amended annuity definition (20 NYCRR § 131.4(d)(2)(iii), effective for taxable years ending on or after December 16, 1982) applies, and confirm the client's age at the time each payment was received - the exclusion applies to qualifying payments received at 59½ or older in taxable years ending on or after December 16, 1982.

Common questions

Q: I'm receiving long-term disability payments from my former employer and I'm over 59½ - can I exclude them under New York's pension/annuity provision? A: Possibly, as an "annuity" rather than a "pension," but only for payments received in taxable years ending on or after December 16, 1982. The plan must be part of a cohesive retirement scheme, paid in money at regular intervals, with a determinable total amount, under a definite written plan.

Q: Why doesn't my disability plan qualify as a "pension"? A: Because it isn't a qualified pension plan under Internal Revenue Code § 401 - federal regulations specifically exclude disability, sickness, and similar benefits from that definition unless the plan independently meets the qualified-pension-plan tests.

Q: What changed on December 16, 1982 that made these payments eligible? A: A March 16, 1983 amendment to 20 NYCRR § 131.4(d)(2)(iii), applied retroactively to that date, broadened the "annuity" definition to include payments whose total amount is determinable at the annuity starting date through mortality tables or actuarial methods - a standard the disability-then-retirement payment structure could satisfy where the older, stricter "uniform rate" definition could not.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a85_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (2) I
Income Tax
June 6, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I830708A

On July 8, 1983, a Petition for Advisory Opinion was received from Richard J. Alexanderson, 173 Ribbon Street, Franklin Square, New York 11010. The issue raised is whether payments made under Petitioner's employer's-long term disability income plan are included within the category "pensions and annuities," within the meaning of section 612(c)(3-a) of the Tax Law. Section 612(c)(3-a) of the Tax Law provides, in pertinent part, for an exclusion from personal income taxation of a portion of "pensions and annuities received by an individual who has attained the age of fifty-nine and one-half . . . which are periodic payments attributable to personal services performed by . . . (the recipient) prior to his retirement from employment, which arise (i) from an employer-employee relationship . . . . " Petitioner was an employee of C.P.C. International until March 31, 1981 when he became eligible for his employer's long term disability plan. Petitioner is fully retired due to a physical ailment and will never be able to return to any type of employment. Petitioner attained the age of fifty-nine and one-half years on July 9, 1982. Petitioner submitted information describing the plan in pertinent part as follows: All full time salaried employees under age 64½ are eligible for membership in the long term disability plan. The entire cost of the plan is funded by C.P.C. International. If an employee is disabled longer than 6 months, monthly income from the plan will equal 60% of base salary including other disability income up to a maximum benefit of $3,000 per month. Once the plan has been determined, it will not be affected by future increases in Social Security benefits. Any further increases in Social Security will add to total disability income. The plan provides a minimum benefit of at least $100 a month, regardless of whether the employee receives other disability income. Plan income starts after the employee has been totally disabled and under the care of a physician for at least 6 months. During the 6 months, part or all of regular salary may continue, and the employee must also make application for Social Security disability benefits. The benefits will start the first day of the month after disability has lasted for 6 months. Generally after benefits start, they will continue (1) for the next 18 months if the employee cannot perform the duties of his regular 1ob, and (2) up to age 65 or the date of retirement, if earlier - if the employee cannot work at any job for which he is or could become suited by education, training or experience.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-85 (2) I
Income Tax
June 6, 1985

The term "pensions" may be defined generally as "A stated allowance or stipend made by a government or business organization, in consideration of past services or of the surrender of rights or emoluments, to one retired from service . . ." Webster's New International Dictionary, 2d ed., 1959. The application of such general definition to the term "pension" as used in the provision under consideration is limited, by the statutory language itself, as set forth above. Further elucidation may be sought in the Federal treatment of the term "pension," pursuant to section 607 of the Tax Law, which provides that: Any term used in this article (viz., Article 22, which imposes the Personal Income Tax) shall have the same meaning as when used in comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required. Pension plans are treated in section 401 of the Internal Revenue Code. Regulations issued pursuant thereto provide the following: A pension plan within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement. Retirement benefits generally are measured by, and based on, such factors as years of service and compensation received by the employees. The determination of the amount of retirement benefits and the contributions to provide such benefits are not dependent upon profits. Benefits are not definitely determinable if funds arising from forfeitures on termination of service, or other reason, may be used to provide increased benefits for the remaining participants (see Section 1.401­ 7, relating to the treatment of forfeitures under a qualified pension plan). A plan designed to provide benefits for employees or their beneficiaries to be paid upon retirement or over a period of years after retirement will, for the purposes of section 401(a), be considered a pension plan if the employer contributions under the Plan can be determined actuarially on the basis of definitely determinable benefits, or as in the case of money purchase pension plans, such contributions are fixed without being geared to profits. A pension plan may provide for the payment of a pension due to disability and may also provide for the payment of incidental death benefits through insurance or otherwise. However, a plan is not a pension plan if it provides for the payment of benefits not customarily included in a pension plan such as layoff benefits or benefits for sickness, accident, hospitalization, or medical expenses (except medical benefits described in section 401(h) as defined in paragraph (a) of § 1.401­ 14). (26 C.F.R. 1.401-1(b)(1)(i)).

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TSB-A-85 (2) I
Income Tax
June 6, 1985

Accordingly, the payments here under discussion would constitute "pensions," within the meaning of section 612(c)(3-a) of the Tax Law, if paid from a plan constituting a qualified pension plan within the meaning of section 401 of the Internal Revenue Code. Inasmuch as the plan from which the subject payments are made does not qualify under such Federal provision, the payments are not excludable as "pensions." The next question to be addressed is whether the payments at issue constitute "annuities", for purposes of section 612(c)(3-a) of the Tax Law. Prior to an amendment made on March 16, 1983, the term "annuities" was defined, albeit in another context, in the Tax Commission's Personal Income Tax Regulations, as follows: (2)

Definition. To qualify as an annuity, a pension or other retirement benefit must meet the following requirements:

(i)

It must be paid in money only, not in securities of the employer or other property.

(ii)

It must be payable at regular intervals, at least annually, for the life of the individual receiving it, or over a period not less than half his life expectancy as of the date payments begin. An individual's life expectancy is the expected return multiple shown for the applicable age and sex in the table entitled "Table I. Ordinary Life Annuities-One Life-Expected Return Multiples", promulgated under section 1.72-9 of the Federal Income Tax Regulations.

(iii)

It must be payable at a rate which remains uniform during such life or period or at a rate which varies only with (a) the fluctuation in the market value of the assets from which such benefits are payable, (b) the fluctuation in a specified and generally recognized cost-of-living index, or (c) the commencement of social security benefits.

(iv)

The individual's right to receive it must be evidenced by a written instrument executed by his employer, or by a plan established and maintained by the employer in the form of a definite written program communicated to his employees.

(v)

In the case of a pension or other similar benefit paid to a nonresident beneficiary of a deceased employee:

(a)

where the employee died after retirement, if the pension or other retirement benefit he was receiving constituted an annuity, payments to his beneficiary, even though they do not meet the requirements of subparagraphs (i), (ii) and (iii) of this paragraph, will constitute an annuity;

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TSB-A-85 (2) I
Income Tax
June 6, 1985

(b)

if the employee died before retirement, the pension or other benefit payable to his beneficiary need not be payable for the life of such beneficiary or for a period measured by his or her life expectancy, provided that it is payable pursuant to a plan established and maintained by the employer before the employee's death, under which a pension or benefit meeting the requirements set forth in subparagraphs (i) through (iv) of this paragraph would have been payable to the employee upon his retirement. For the purposes of this clause, the employee's life expectancy is determined as of the date of his death if he was then eligible for retirement under the terms of the plan; otherwise, his life expectancy is determined as of the earliest date when he would have become eligible for retirement under the plan. 20 NYCRR §131.4 (d)(2).

Inasmuch as the payments at issue do not satisfy the requirement set forth at 20 NYCRR
§131.4(d)(2)(iii), the same do not constitute "annuities," within the meaning of section 612(c)(3-a) of the Tax Law as construed by 20 NYCRR §131.4(d) prior to its amendment on March 16, 1983. On March 16, 1983, Section 131.4(d)(2)(iii) was amended to read as follows: (iii) It must be payable (a) at a rate which remains uniform during such life or period or (b) at a rate which varies only with (i) the fluctuation in the market value of the assets from which Such benefits are payable, (2) the fluctuation in a specified and generally recognized cost-of-living index, or (3) the commencement of social security benefits or (c) in such a manner that the total of the amounts payable is determinable at the annuity starting date either directly from the terms of the contract or indirectly by the use of either mortality tables or compound interest computations, or both, in conjunction with such terms and in accordance with sound actuarial theory. The term "Annuity starting date" in the case of any contract or plan is the first day of the first period for which an amount is received as an annuity by the individual under the contract or plan. Such amendment is applicable to taxable years ending on or after December 16, 1982. With respect to such periods, the payments made to petitioner will qualify as annuities, for purposes of section 612(c)(3-a) of the Tax Law. First the payments are retirement benefits inasmuch as they are paid as part of a plan of payments made to an individual who is permanently disabled, and thus embarked upon a permanent cessation of active employment during which period he is to receive two series of payments, one from the Disability Plan followed by one from Petitioner's Retirement Plan. Thus, the requirement of the introductory clause of 20NYCRR 131.4(d)(2), that the payments constitute a "retirement benefit," is satisfied. Subparagraph (i) is satisfied since the payments are made in money only. Subparagraph (ii) is satisfied as the payments are made at regular monthly intervals for life or at least half of the life expectancy of the individual, treating the "disability" and "retirement" arrangements as constituting together a cohesive scheme of retirement benefits.

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TSB-A-85 (2) I
Income Tax
June 6, 1985

The third subparagraph is satisfied since the total of the amounts payable is determinable at the annuity starting date. Inasmuch as the benefits payable. under the Disability Plan are determined solely by reference to such objective factors as the employee's prior service and compensation, and any benefits to which he or she is entitled under the Social Security and Workers' Compensation laws. Subparagraph (iv) provides that the individual's right to receive an annuity must be evidenced by a written instrument executed by his employer or by a plan established and maintained by his employer in the form of a definite written program communicated to its employees. The Disability Plan at issue is a "definite written program", and it has been communicated to all regular C.P.C. International employees. The plan is included in full in a booklet entitled "Your Benefit Program As a Salaried Employee C.P.C. International", which is distributed to all regular C.P.C. International employees. Thus, the Disability Plan satisfied the requirements of subparagraph (iv). Accordingly, payments made to the petitioner under the subject disability plan during taxable years ending on or after December 16, 1982 constitute "annuities'' subject to the exclusion provided for in section 612(c)(3-a) of the Tax Law. However, only those payments received by the petitioner after he had attained the age of fifty-nine and one-half years will qualify for such exclusion.

DATED: March 19, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.