New York Advisory Opinion TSB-A-86 (4)I: If a New York resident defers compensation under a New York State employee deferred compensation plan and later becomes a nonresident, is the withdrawal subject to New York personal income tax, and does the $20,000 pension exclusion apply?

Plain-English summary

Robert Vincent Smith - the same petitioner who separately asked about IRA withdrawals in the companion opinion TSB-A-86(3)I, filed a few weeks earlier - deferred compensation under a New York State employee deferred compensation plan while a New York resident, and asked whether the withdrawal (and income earned on the deferred amounts) would be taxable in New York if he became a nonresident before withdrawing. This plan falls under IRC § 457, which provides that deferred amounts and their earnings are included in gross income only when actually paid or made available to the participant - and Chapter 306 of the Laws of 1985 conformed New York's treatment of such state deferred compensation plans to that federal § 457 treatment (per Technical Services Bureau Memorandum TSB-M-85-(16)-I). The Department also confirmed that, since federal regulations treat income earned on the deferred amounts the same as the deferred compensation itself, any reference to "amounts deferred" in the opinion covers both.

The key characterization question was whether these amounts are wages or a pension/annuity for New York's nonresident-allocation purposes. Federal regulations (26 CFR 35.3405-1) characterize section 457 deferred amounts as wages, and Tax Law § 607 carries that same characterization into New York law. Because they're wages rather than a pension, the Department applied Tax Law § 632(a)-(b)'s ordinary New York-source rules (income connected to a trade, business, profession, or occupation carried on in New York) rather than the pension-specific allocation regulation used in the companion IRA opinion. The practical result was nearly identical, though: if the entire deferred amount is attributable solely to services performed in New York, the entire amount is taxable; if entirely attributable to services outside New York, none of it is taxable; and if attributable partly to New York services and partly to services elsewhere, the taxpayer must equitably apportion the deferred amount under 20 NYCRR 131.23 - and the Department noted the pension-allocation method in regulation § 131.20 (the same one used for the IRA opinion) may be used for this apportionment as well.

Finally, because these amounts are wages rather than pension or annuity income, the Department confirmed they do NOT qualify for the separate $20,000 section 612(c)(3-a) pension and annuity exclusion, unlike the IRA distributions addressed in the companion opinion (which DID qualify for that exclusion, on an allocated basis).

What this means for you

Former New York State employees who deferred compensation under a section 457 state plan

If you move out of New York before withdrawing your deferred compensation, expect New York to tax only the portion attributable to services you actually performed in New York - using an equitable apportionment method (potentially the same 4-year look-back used for pensions) rather than an all-or-nothing rule based solely on your residency at the time of withdrawal.

Individuals comparing IRA withdrawals to section 457 state deferred-compensation withdrawals

Don't assume these two types of retirement savings get identical New York tax treatment just because both involve pre-tax deferrals. This opinion (issued for the same petitioner as the companion IRA opinion TSB-A-86(3)I) confirms a key difference: section 457 deferred compensation is treated as WAGES, not a pension, so it does NOT qualify for the $20,000 age-59½ pension and annuity exclusion that IRA distributions can receive.

Accountants advising public-sector employees near retirement or relocation

When a client has both an IRA and a New York State section 457 deferred compensation plan and is planning to move out of state, apply different rules to each: apportion both based on where services were performed, but only the IRA distribution is eligible for the section 612(c)(3-a) exclusion - the section 457 withdrawal, characterized as wages, is not.

Common questions

Q: I deferred compensation under a NY State employee deferred compensation plan and now live outside New York - is my withdrawal taxable in New York?
A: Only to the extent it's attributable to services you performed within New York State. If your services were split between New York and elsewhere, you must equitably apportion the deferred amount, potentially using the same allocation method used for pensions (20 NYCRR 131.20).

Q: Does the $20,000 pension and annuity exclusion apply to my section 457 deferred compensation withdrawal?
A: No. Because federal regulations characterize section 457 deferred amounts as wages (not pension or annuity payments), and New York follows that federal characterization, these amounts don't qualify for the section 612(c)(3-a) exclusion - unlike IRA distributions, which can qualify.

Q: How is this different from the tax treatment of my IRA withdrawal?
A: Both are apportioned based on where the underlying services were performed, but the underlying legal characterization differs: IRA distributions are treated under the pension-allocation framework and can qualify for the age-59½ exclusion, while section 457 deferred compensation is treated as wages and does not qualify for that exclusion. See the companion opinion, TSB-A-86(3)I, for the IRA-specific analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a86_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (4) I
Income Tax
May 3, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I860228A

On February 2, 1986, a Petition for Advisory Opinion was received from Robert Vincent
Smith, 451 Winter Street, Ext., Troy, New York 12180.
The issue raised is whether contributions to a New York State employee deferred
compensation plan made by a New York State resident will be subject to the personal income tax
imposed under Article 22 of the Tax Law when withdrawn from the plan if, at the time of
withdrawal, the resident has changed his status and become a nonresident. Additionally, Petitioner
asks whether income earned on such contributions will be taxable upon withdrawal.
Subsection (a) of section 457 of the Internal Revenue Code provides: "In the case of a
participant in an eligible State deferred compensation plan, any amount of compensation deferred
under the plan, and any income attributable to the amounts so deferred, shall be includible in gross
income only for the taxable year in which such compensation or other income is paid or otherwise
made available to the participant or other beneficiary."
Chapter 306 of the Laws of 1985 amended the New York Tax Law to provide that amounts
deferred under State deferred compensation plans will receive the same treatment for New York
State personal income tax purposes as such amounts receive for federal income tax purposes under
section 457 of the Internal Revenue Code. Technical Services Bureau Memorandum TSB-M-85­
(16)-I.
Federal regulation 1.457-I(d)(3) provides: "Amounts deferred. "Amount(s) deferred" under
an eligible plan means compensation deferred under the plan, plus income attributable to
compensation so deferred. Income attributable to compensation deferred under an eligible plan
includes gain from the disposition of property .... " 26 CFR 1.457-1.
Accordingly, for federal income tax purposes, and hence for New York State personal income
tax purposes, income earned on compensation deferred under such a plan is treated the same as the
compensation deferred. Thus, any reference in this advisory opinion to amounts deferred is intended
to include deferred compensation and income earned thereon.
Section 632(a) of the Tax Law provides, in part, that the "New York adjusted gross income
of a nonresident individual shall be the sum of the following: (1) The net amount of items of income,
gain, loss and deduction entering into his federal adjusted gross income. . .,derived from or
connected with New York sources . ... " Section 632(b) of the Tax Law provides, in part, that "items
of income, gain, loss and deduction derived from or connected with New York sources shall be those
items attributable to: . .a business, trade, profession or occupation carried on in this state...”

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

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

-2­
TSB-A-86 (4) I
Income Tax
May 3, 1986

For Federal purposes, such amounts deferred under such a plan are characterized as wages.
26 CFR 35.3405.-1. Accordingly, such amounts deferred are characterized as wages for New York
State personal income tax, purposes as well. Tax Law section 607. Inasmuch as amounts deferred
are treated as wages, they are deemed, for purposes of section 632 of the Tax Law, to be derived
from or connected with a New York source to the extent that Petitioner performed services in New
York State.
Accordingly, if the entire amount deferred is attributable solely to services performed within
New York State, then the entire amount deferred is subject to New York personal income tax. If the
entire amount deferred is attributable solely to services performed outside of New York State, then
pone of the amount deferred is subject to tax. If the amount deferred is attributable, in part, to
services performed within New York State and, in part, to services performed outside of New York
State, then a portion of the amount deferred will be subject to tax. In such a case, the taxpayer must
apportion the amount deferred in such a manner as to equitably reflect the amount of deferred
compensation attributable to services performed within New York State. 20 NYCRR 131.23. In
this regard, the method of allocation for pensions and other retirement benefits provided by
regulation section 131.20 may be used by Petitioner to allocate the amount deferred.
It should also be noted that amounts deferred do not qualify for the pension and annuity
exclusion under section 612(c)(3-a) of the Tax Law. Technical Services Bureau Memorandum TSBM-85-(16)-I.

DATED: April 10, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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