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 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 treating the deferred amounts as pension income. Under this opinion: 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 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, as stated in Technical Services Bureau Memorandum TSB-M-85-(16)-I.

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.

Section 457 plan participants checking the pension exclusion

This opinion treats deferred amounts as wages and says they do not qualify for the section 612(c)(3-a) pension and annuity exclusion.

Accountants advising public-sector employees near retirement or relocation

For a New York State section 457 plan participant who moves away, determine the portion attributable to New York services. The deferred amounts are wages and do not qualify for the section 612(c)(3-a) exclusion.

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.

Q: How are deferred amounts allocated when services were performed inside and outside New York? A: The taxpayer must equitably apportion them under 20 NYCRR 131.23. The Department says the pension-allocation method in section 131.20 may be used for that purpose.

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.