If a college professor accepts a 'buyout' paying 50% of salary for three years, and separately draws periodic payments from his TIAA defined-contribution pension plan, do either of those payments qualify for New York's $20,000 pension and annuity income exclusion once he turns 59 1/2?

Plain-English summary

Petitioner Marvin J. Weiss worked full time as a college professor until September 1996, when he accepted a "buyout": he officially resigned his tenured position in exchange for 50% of his salary for the next three years. All other benefits ended, including the school's contributions to his Teachers Insurance and Annuity Association (TIAA) defined-contribution pension plan. Weiss continued working part time as an adjunct and could make his own (unmatched) voluntary contributions to the TIAA plan from his adjunct wages. When he eventually starts drawing from the TIAA plan, he intends to choose the "interest only" payout option - periodic payments that change only when TIAA changes its interest rate - rather than annuitizing the account's principal. He asked whether both the buyout payments and the future TIAA pension payments would qualify, once he turns 59 1/2, for New York's $20,000 pension and annuity exclusion under Tax Law § 612(c)(3-a).

The Department split the answer in two. For the buyout, federal law treats employer severance/termination payments as ordinary taxable wage compensation (Treas. Reg. § 1.61-2(a)(1)), reported on a W-2 - not as a pension distribution reported on Form 1099-R (Treas. Reg. § 1.61-11(a)). Because New York's Article 22 terms track federal meanings absent contrary intent (Tax Law § 607(a)) and New York adjusted gross income starts from federal adjusted gross income (Tax Law § 612(a)), the buyout payments are likewise wages for New York purposes, not pension income - so they cannot use the § 612(c)(3-a) exclusion at all.

For the TIAA plan, the outcome depends on which payout option Weiss picks. Section 612(c)(3-a) and 20 NYCRR 112.3(c)(2)(i) require, among other things, that the income be received in periodic payments. Because the "interest only" option pays out periodically (fluctuating only with TIAA's interest rate), TIAA payments under that option will qualify for the up-to-$20,000 exclusion once Weiss turns 59 1/2. The opinion adds a caveat: if the TIAA pension were instead attributable solely to public employment with New York State or its subdivisions (for example, SUNY), it would be handled differently - fully excludable under the separate public-employee pension exemption in Tax Law § 612(c)(i), rather than capped at $20,000 under § 612(c)(3-a). That alternate exemption did not apply on these facts.

What this means for you

Employees accepting an early-retirement or severance "buyout"

A lump-sum-in-installments buyout tied to resignation - even one that replaces a large chunk of your former salary for several years - is taxed as ordinary wage income, not pension income, both federally and in New York. It will show up on your W-2, and it does not get any benefit from the $20,000 pension and annuity exclusion, no matter your age.

Retirees choosing a payout option from a defined-contribution plan like TIAA

If you have a defined-contribution retirement account and want your distributions to qualify for New York's $20,000 pension and annuity exclusion once you're 59 1/2 or older, the payout option you select matters. A periodic option (such as "interest only," which changes only with the fund's interest rate) satisfies the periodic-payment requirement. Also confirm whether your pension is attributable solely to work for a New York public employer - if so, a separate, uncapped exemption under Tax Law § 612(c)(i) may apply instead of the $20,000-limited subtraction.

Common questions

Q: Why doesn't the buyout qualify as a pension for the $20,000 exclusion?
A: Federally, severance and termination payments from an employer are treated as taxable wage compensation under Treas. Reg. § 1.61-2(a)(1) and reported on Form W-2 - they are not pension distributions under Treas. Reg. § 1.61-11(a), which are reported on Form 1099-R. Because New York's income tax rules conform to federal characterizations (Tax Law §§ 607(a) and 612(a)), the buyout stays wages for New York purposes too, and § 612(c)(3-a) only covers pension and annuity income.

Q: Why does the payout option chosen for the TIAA plan matter for the exclusion?
A: Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2)(i) require that qualifying pension and annuity income be received in periodic payments. The "interest only" option pays out periodically (changing only with TIAA's interest rate), so it satisfies that requirement. A different, non-periodic payout method might not.

Q: What if Weiss's TIAA pension were instead attributable solely to public employment with New York State, such as at SUNY?
A: Then it would not be governed by the $20,000-capped subtraction in § 612(c)(3-a) at all - it would instead be excludable under Tax Law § 612(c)(i), the separate modification for pensions and retirement benefits paid to public officers and employees of New York State, its political subdivisions, or agencies. On the facts presented, Weiss's TIAA plan is not described as attributable solely to such public employment, so this alternate exemption did not apply.

Q: Does continuing to work part time as an adjunct and making voluntary TIAA contributions change the analysis?
A: The opinion notes those facts but does not treat them as changing the outcome - the buyout payments remain wages, and the TIAA plan payments are analyzed under the same periodic-payment requirement regardless of the source of the contributions funding the account.

Q: Is there a maximum dollar amount to the pension and annuity exclusion?
A: Yes. Tax Law § 612(c)(3-a) caps the subtraction at $20,000 of pension and annuity income per qualifying individual who is 59 1/2 or older, and the income must also be included in federal adjusted gross income and attributable to personal services performed before retirement.

Q: Could Weiss ever get more than $20,000 excluded from his TIAA plan payments?
A: Not under § 612(c)(3-a), which is capped at $20,000. The opinion identifies only one path to a larger (uncapped) exclusion: if the TIAA pension were attributable solely to New York public employment, in which case § 612(c)(i) - not § 612(c)(3-a) - would apply instead.

Citations and references

• Tax Law § 612(a) - New York adjusted gross income of a resident individual means federal adjusted gross income with specified modifications
• Tax Law § 612(c)(3-a) - allows a subtraction of up to $20,000 of pension and annuity income for taxpayers 59 1/2 or older, if the income is in federal AGI, paid periodically, attributable to pre-retirement personal services, and not from an IRA/Keogh distribution
• Tax Law § 612(c)(i) - separate modification excluding pensions and retirement benefits paid to public officers and employees of New York State, its political subdivisions, or agencies
• Tax Law § 607(a) - Article 22 terms carry the same meaning as comparable Internal Revenue Code terms unless a different meaning is clearly required
• 20 NYCRR 112.3(c)(2)(i) - regulatory conditions for the § 612(c)(3-a) pension and annuity income subtraction
• Treas. Reg. § 1.61-2(a)(1) - severance and termination payments from an employer are taxable wage compensation reported on Form W-2
• Treas. Reg. § 1.61-11(a) - pension distributions are includible in gross income and reported on Form 1099-R

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a97_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(5)I
Income Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I970421A

On April 21, 1997, a Petition for Advisory Opinion was received from Marvin
J. Weiss, 26 Sherwood Drive, Larchmont, New York 10538.
The issue raised by Petitioner, Marvin J. Weiss, is whether the "buyout"
payments and the pension payments that he receives will qualify for exclusion,
when he reaches age 59 1/2, under the pension and annuity rules contained in
section 612(c)(3-a) of Article 22 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner worked full time as a college professor until September 1996
when he accepted a "buyout". The terms of the "buyout" required that Petitioner
officially resign from his tenured position, and that he would receive 50 percent
of his salary for the next three years. Other than health coverage provided for
retirees from the school, all other benefits ceased, including the school's
contribution to Petitioner's Teachers Insurance and Annuity Association (TIAA)
defined contribution pension plan (TIAA plan).
Petitioner continues to work for the school part time and is paid as a
part-timer (adjunct). Petitioner is allowed to make voluntary contributions to
his TIAA plan based on his adjunct wages, but the contributions are not matched
by the school.
When Petitioner starts drawing from his TIAA plan, he plans to select the
interest only option, rather than annuitizing the principal in his account. The
interest only option will be paid on a periodic basis, and will only fluctuate
if and when TIAA changes the interest rate.
Section 612(a) of the Tax Law defines New York adjusted gross income of a
resident individual as the individual's federal adjusted gross income with
certain modifications.
Section 612(c)(3-a) of the Tax Law contains a
modification for pension and annuity income, other than pensions and other
retirement benefits paid to public officers and public employees of New York
State, its political subdivisions or agencies or the federal government.
Section 612(c)(3-a) of the Tax Law and section 112.3(c)(2)(i) of the
Personal Income Tax Regulations provide that pension and annuity income not in
excess of $20,000, received by an individual, may be subtracted in determining
the individual's New York adjusted gross income providing the following
conditions are met:

-2­
TSB-A-97(5)I
Income Tax

(a) the pension and annuity income must be included in federal
adjusted gross income;
(b) the pension and annuity income must be received in periodic
payments (except distributions from an individual retirement account
[IRA] or self-employed retirement plan [Keogh]);
(c) the pension and annuity income must be attributable to personal
services performed by such individual, prior to such individual's
retirement from employment, which arises from either an employer­
employee relationship or from contributions to a retirement plan
which are tax deductible under the Internal Revenue Code ("IRC")
(e.g., IRA or Keogh); and
(d) such individual receiving the pension and annuity income must be
59 and 1/2 years of age or over.
Section 607(a) of the Tax Law provides that any term used in Article 22 of
the Tax Law shall have the same meaning as when used in a comparable context in
the IRC, unless a different meaning is clearly required.
For federal income tax purposes severance and termination payments that are
provided by the employer upon ending the employment relationship are generally
viewed as taxable compensation under section 1.61-2(a)(1) of the Treasury
Regulations (section 61(a)(1) of the IRC) and are reported with the employee's
other salary and wages on the employee's federal income tax return. The employee
receives a form W-2 for this income. Pension distributions are includible in
gross income under section 1.61-11(a) of the Treasury Regulations (section
61(a)(11) of the IRC) and are reported as pension income on the employee's
federal income tax return.
The employee receives a form 1099-R for these
distributions.
In this case, Petitioner accepted a "buyout" requiring that he officially
resign from his tenured position and that he would receive 50 percent of his
salary for the next three years. Petitioner continues to work for the college
part-time.
For federal income tax purposes, the "buyout" payments are
characterized as wage compensation that is included with Petitioner's other
salary and wages reported on Petitioner's W-2 issued by the college. Pursuant
to the federal conformity treatment required by sections 607 (terms have the same
meaning) and 612(a) (starting point is federal adjusted gross income) of the Tax
Law, the "buyout" payments are also characterized as wages for New York State
personal income tax purposes. Therefore, these payments do not qualify for the
exclusion provided in section 612(c)(3-a) of the Tax Law for certain pension and
annuity income.
With respect to Petitioner's pension income from his TIAA plan, if
Petitioner selects the interest only option that is paid on a periodic basis
fluctuating only when TIAA changes the interest rate, the pension payments
Petitioner receives from his TIAA plan when he reaches age 59 1/2 will qualify
for the subtraction provided in section 612(c)(3-a) of the Tax Law up to the
$20,000 maximum exclusion.

-3­
TSB-A-97(5)I
Income Tax

It should be noted that if Petitioner's pension income from his TIAA plan
is attributable solely to employment as a public employee of New York State, its
political subdivisions or agencies (for example, the State University of New
York), then Petitioner's pension income, to the extent included in gross income
for federal income tax purposes, would be excludable under section 612(c)(i) of
the Tax Law for purposes of computing New York adjusted gross income. Section
612(c)(i) of the Tax Law contains a modification reducing federal adjusted gross
income for pension and annuity income that is paid to public officers and public
employees of New York State, its political subdivisions or agencies.

DATED: July 21, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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