If a former New York State employee moves to Florida and later takes a lump-sum withdrawal from the NYS Deferred Compensation Plan (a section 457 plan), can New York still tax that payment as a nonresident's income?

Plain-English summary

Petitioner Michael Napolitano moved out of New York State to Florida on August 1, 1995, and is a Florida resident and domiciliary. While he was a New York State employee, he participated in the New York State Deferred Compensation Plan (the Copeland Plan), a plan established under section 457 of the Internal Revenue Code. All of his contributions to the plan, and most of the gains on those contributions, accumulated while he was still a New York resident. By late 1996 the account held over $8,000 in tax-deferred contributions and over $5,000 in tax-deferred gains, and Napolitano wanted to withdraw the entire balance in a single lump sum in late 1996 or early 1997.

The question was whether that lump-sum payment counts as "retirement income" under federal Public Law 104-95, which added 4 U.S.C. § 114. That statute provides that no state may tax the retirement income of a person who is not its resident or domiciliary, and it specifically defines "retirement income" to include income from an eligible deferred compensation plan under IRC § 457. The statute applies to amounts received after December 31, 1995.

The Department concluded that the NYS Deferred Compensation Plan is exactly the kind of section 457 plan covered by 4 U.S.C. § 114(b)(1)(F). Because Napolitano would receive his lump-sum payment while a Florida resident and domiciliary, and after December 31, 1995, federal law preempts New York from imposing its Article 22 personal income tax on that payment - even though the money was earned and accumulated while he lived and worked in New York.

What this means for you

Former New York public employees who moved out of state with a NYS deferred comp (457) account

If you left New York State employment, moved your residence and domicile to another state, and still hold a balance in the NYS Deferred Compensation Plan or a similar IRC § 457 eligible deferred compensation plan, a lump-sum (or other) distribution you receive after you've become a nonresident/nondomiciliary is treated as federally protected "retirement income." New York cannot tax it, regardless of how much of the account's value was contributed or earned while you were still a New York resident.

Accountants and tax professionals advising on federal preemption of state retirement-income taxation

This opinion is a useful, narrow illustration of how 4 U.S.C. § 114 (Public Law 104-95) overrides a state's normal source-based taxing power for "retirement income," which by statutory definition reaches IRC § 457 deferred compensation plans. When advising a client who changed states before drawing down a 457 account, confirm (1) the client's residency/domicile at the time of receipt, (2) that the payment is received after December 31, 1995, and (3) that the plan is the type of arrangement listed in 4 U.S.C. § 114(b)(1) - here, an IRC § 457 plan - before concluding the state-of-origin cannot tax the distribution.

Common questions

Q: Does it matter that Napolitano's contributions and gains accumulated while he was still a New York resident?
A: No. The opinion holds that the source of the funds doesn't change the analysis - what matters is that the payment is "retirement income" as federally defined and that it is received while the recipient is not a resident or domiciliary of New York.

Q: Does the federal exemption apply only to periodic pension payments, or also to a single lump-sum withdrawal?
A: It applies to the lump-sum withdrawal at issue here. The opinion addresses Napolitano's plan to take his entire account balance in one lump-sum payment and still finds it exempt as "retirement income" under 4 U.S.C. § 114(b)(1)(F).

Q: Why does the December 31, 1995 date matter?
A: 4 U.S.C. § 114(c) provides that the preemption provisions apply only to amounts received after December 31, 1995. Napolitano's planned withdrawal in late 1996 or early 1997 falls after that date, so the exemption is available to him.

Q: What kind of plan is the "Copeland Plan" referenced in the opinion?
A: It is the New York State Deferred Compensation Plan, an eligible deferred compensation plan established under section 457 of the Internal Revenue Code - the same category of plan expressly listed as "retirement income" in 4 U.S.C. § 114(b)(1)(F).

Q: Could New York tax this payment under its own Tax Law Article 22 if federal law didn't exist?
A: The opinion doesn't need to reach that question, because it resolves the issue entirely on federal preemption grounds: once 4 U.S.C. § 114(a) applies, New York "may not impose personal income tax under Article 22 of the Tax Law" on the retirement income of a nonresident/nondomiciliary.

Q: Does this opinion bind the Department for other taxpayers in similar situations?
A: No. Like all New York Advisory Opinions, it is binding only as to the petitioner who requested it, and only to the extent the facts were fully and accurately described; it doesn't create a rule of general applicability for other taxpayers.

Citations and references

• 4 U.S.C. § 114(a) - bars a state from imposing an income tax on the retirement income of an individual who is not a resident or domiciliary of that state
• 4 U.S.C. § 114(b)(1)(F) - defines "retirement income" to include income from an eligible deferred compensation plan as defined in IRC § 457
• 4 U.S.C. § 114(c) - these provisions apply to amounts received after December 31, 1995
• Public Law 104-95 (effective January 10, 1996) - added 4 U.S.C. § 114
• Internal Revenue Code § 457 - defines eligible deferred compensation plans, including the NYS Deferred Compensation Plan (Copeland Plan)
• Tax Law Article 22 - New York's personal income tax, which the Department concluded may not reach this retirement income under federal preemption

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a96_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-96 (6) I
Income Tax
December 24, 1996

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I961002B

On October 2, 1996, a Petition for Advisory Opinion was received from
Michael Napolitano, 8575 NW ll5th Avenue, Ocala, Florida 34482.
The issue raised by Petitioner, Michael Napolitano, is whether a lump-sum
payment from an eligible deferred compensation plan under section 457 of the
Internal Revenue Code, that is paid to a nonresident of New York State, is
"retirement income" as defined in Public Law 104-95 and exempt from New York
State personal income tax under Article 22 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a resident of and domiciled in Florida, having moved out of
New York State on August 1, 1995.
Petitioner, while an employee of New York State, participated in the New
York State Deferred Compensation Plan (Copeland Plan 457). The New York State
deferred compensation plan is a plan established under the provisions of section
457 of the Internal Revenue Code. All of the contributions and a substantial
amount of the gains were accumulated during the time Petitioner was a resident
domiciliary of New York State.
Petitioner desires to effect a lump-sum withdrawal of all funds available
in his deferred compensation account, either in late 1996 or early 1997. The
funds on deposit consist of over $8,000 in tax deferred contributions, and over
$5,000 in tax deferred gains.
Section l14(a) of Title 4 of the US Code, as added by Public Law 104-95,
January 10, 1996, provides that "[n]o State may impose an income tax on any
retirement income of an individual who is not a resident or domiciliary of such
State (as determined under the laws of such State)." Section l14(b)(1) of Title
4 of the US Code defines the term "retirement income" as "any income from ... (F)
an eligible deferred compensation plan (as defined in section 457 of [the
Internal Revenue Code] .... " Section 114(c) of Title 4 of the US Code provides
that these provisions shall apply to amounts received after December 31, 1995.
Accordingly, pursuant to section 114 of Title 4 of the US Code, New York
State may not impose personal income tax under Article 22 of the Tax Law on the
retirement income of an individual who is not a resident or domiciliary of the
State. An individual's retirement income includes income from a deferred
compensation plan under section 457 of the Internal Revenue Code.

In this case, the New York State deferred compensation plan is a plan
described under section 457 of the Internal Revenue Code. Therefore, pursuant to
section l14(a) of Title 4 of the US Code, the income Petitioner receives from the
deferred compensation plan in a lump-sum payment while not a resident or

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TSB-A-96 (6) I
Income Tax
December 24, 1996

domiciliary of New York State would be exempt from New York State's personal
income tax under Article 22 of the Tax Law for a lump-sum payment received from
the plan after December 31, 1995.

DATED: December 24, 1996

s/John W. Bartlett
Deputy Director
Technical Services Bureau

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