Are retirement, thrift, and benefits-equalization plan distributions paid to Federal Reserve System employees exempt from New York personal income tax?

Plain-English summary

The Office of the Federal Reserve Benefits System, which administers retirement benefits for employees of the Board of Governors of the Federal Reserve System, the twelve Federal Reserve Banks, and itself, asked whether four types of distributions are subtracted from federal adjusted gross income under Tax Law § 612(c)(3)(ii) when a New York resident computes New York adjusted gross income: (1) distributions from the Retirement Plan, a qualified defined-benefit pension plan; (2) distributions (other than in-service withdrawals) from the Thrift Plan, a qualified 401(k)-type plan with employer matching; (3) distributions from the Retirement Plan Benefits Equalization Plan ("Retirement Plan BEP"), an unfunded nonqualified plan that restores benefits lost to IRC limits on the Retirement Plan; and (4) distributions from the Thrift Plan Benefits Equalization Plan ("Thrift Plan BEP"), an unfunded nonqualified plan that restores employer matching lost to IRC limits on the Thrift Plan.

Section 612(c)(3)(ii) of the Tax Law lets a resident subtract pensions paid to officers or employees of the United States, its territories, the District of Columbia, or any federal agency or instrumentality, to the extent the pension is included in federal gross income. That provision was added in 1989 to respond to Davis v. Michigan Department of the Treasury, which held that a state exempting its own employees' pensions must extend the same exemption to federal employees, under the nondiscrimination principle of 4 U.S.C. § 111. New York's regulation, 20 NYCRR 112.3(c)(1)(i)(b), likewise subtracts pensions and other retirement benefits paid to a public employee of a US instrumentality. Courts have held the Federal Reserve Banks to be instrumentalities of the United States for tax-immunity purposes (Lewis v. United States; Federal Reserve Bank of Boston v. Comm'r of Corporations & Taxation), and the IRS separately ruled in 1976 that the Federal Reserve System is a governmental instrumentality under IRC § 414(d).

The Department concluded that all four categories of distributions qualify as a "pension or other retirement benefit" within the meaning of § 612(c)(3)(ii) and the regulation, following its own earlier opinions in Charles E. Rockey (holding Federal Reserve Retirement Plan payments exempt) and Joseph T. DiGianni (distinguishing pension-like defined-contribution accounts from merely supplemental ones based on whether the employer makes matching contributions). Because the Federal Reserve matches employee contributions to the Thrift Plan, and because the two BEP plans are designed purely to restore benefits the Retirement Plan and Thrift Plan would otherwise have paid but for IRC dollar caps, all four distribution streams were treated as pension income paid to an employee of a federal instrumentality, and therefore all four are subtracted from federal adjusted gross income under § 612(c)(3)(ii). The opinion notes that in-service withdrawals from the Thrift Plan were excluded from the question and the ruling's conclusion.

What this means for you

Federal Reserve System employees and retirees

If you're a New York resident who worked for the Board of Governors, a Federal Reserve Bank, or the Office of the Federal Reserve Benefits System, distributions you receive from the Retirement Plan, the Thrift Plan (other than in-service withdrawals), the Retirement Plan BEP, or the Thrift Plan BEP can be subtracted from your federal adjusted gross income when you compute your New York adjusted gross income, to the extent the distribution is included in your federal gross income.

Accountants and tax professionals

When preparing a New York return for a Federal Reserve retiree, treat payments from any of these four plans as a "pension or other retirement benefit" eligible for the § 612(c)(3)(ii) subtraction. Watch for the one carve-out: in-service withdrawals from the Thrift Plan (lump-sum withdrawals taken while still employed, subject to the IRC § 72(t) early-distribution penalty) were not part of what the Department addressed here.

Nonqualified/BEP plan administrators

This opinion confirms that unfunded, nonqualified "excess benefit" plans - here, the Retirement Plan BEP and Thrift Plan BEP, which exist solely to restore benefits capped by IRC §§ 401(a)(17) and 415 - can still qualify as a "pension or other retirement benefit" for New York subtraction purposes, so long as they are paid to an employee of a US instrumentality and are designed as a direct complement to an underlying qualified plan.

Common questions

Q: Are distributions from the Federal Reserve's Retirement Plan taxable in New York?
A: No. They are subtracted from federal adjusted gross income under Tax Law § 612(c)(3)(ii) because the Retirement Plan is a pension paid to an employee of a federal instrumentality.

Q: What about the Thrift Plan, which is more like a 401(k)?
A: Distributions from the Thrift Plan (other than in-service withdrawals) also qualify for the § 612(c)(3)(ii) subtraction, because the Federal Reserve matches employee contributions the same way the government matched contributions in the Department's earlier DiGianni opinion.

Q: Do in-service withdrawals from the Thrift Plan get the same treatment?
A: The ruling's conclusions address distributions from the Thrift Plan "other than in-service withdrawals" - in-service withdrawals were carved out of the question presented and are not addressed by this opinion.

Q: Why do the unfunded Benefits Equalization Plans (BEPs) also qualify, even though they're nonqualified?
A: Because each BEP is designed purely to be complementary to its underlying qualified plan - restoring benefits or matching contributions lost solely because of IRC §§ 401(a)(17) and 415 dollar limits - the Department treated BEP distributions the same as distributions from the qualified plans they supplement.

Q: Why does the Federal Reserve get this treatment at all?
A: Because courts (Lewis v. United States; Federal Reserve Bank of Boston v. Comm'r of Corporations & Taxation) and the IRS have both treated the Federal Reserve System as an instrumentality of the United States, its employees' pensions fall within § 612(c)(3)(ii)'s subtraction for pensions paid to employees of the US or its instrumentalities.

Citations and references

• Tax Law § 612(c)(3)(ii) - subtraction from federal AGI for pensions paid to officers/employees of the US or its instrumentalities, to the extent includible in federal gross income
• Tax Law § 607 - undefined Article 22 terms have the same meaning as under federal income tax law
• 20 NYCRR 112.3(c)(1)(i)(b) - pensions and other retirement benefits paid to a public employee of a US instrumentality are subtracted from federal adjusted gross income
• 4 U.S.C. § 111 - federal consent to nondiscriminatory state taxation of federal officers'/employees' pay, underlying Davis v. Michigan Department of the Treasury
• Prior Department opinions cited: Richard J. Alexanderson, TSB-A-85(2)I; Charles E. Rockey, TSB-A-90(8)I; Joseph T. DiGianni, TSB-A-94(1)I

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a01_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(1)I
Income Tax
April 12, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I000613A

On June 13, 2000, a Petition for Advisory Opinion was received from Office of the Federal
Reserve Benefits System, 95 Maiden Lane, 3rd Floor, New York, New York 10045.
The issue raised by Petitioner, Office of the Federal Reserve Benefits System, is whether for
personal income tax purposes the following distributions are subtracted from federal adjusted gross
income, pursuant to section 612(c)(3)(ii) of the Tax Law, when the individual receiving such
distributions computes his or her New York adjusted gross income:

1. Distributions from the Retirement Plan For Employees of the Federal Reserve System (the
   “Retirement Plan”).
2. Distributions (other than in-service withdrawals) from the Thrift Plan For Employees of
   the Federal Reserve System (the “Thrift Plan”).
3. Distributions from the Retirement Plan for Employees of the Federal Reserve System
   Benefits Equalization Plan (the “Retirement Plan BEP”).
4. Distributions from the Thrift Plan for Employees of the Federal Reserve System Benefits
   Equalization Plan (the “Thrift Plan BEP”).
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   Petitioner, as agent for the Committee on Plan Administration, administers the Retirement
   Plan, the Thrift Plan, the Retirement Plan BEP, and the Thrift Plan BEP which collectively provide
   retirement benefits for employees of the Board of Governors of the Federal Reserve System (the
   “Board”), the twelve Federal Reserve Banks (the “Banks”) and Petitioner (collectively, the “Federal
   Reserve”). The Retirement Plan and Thrift Plan are sometimes referred to herein collectively as
   “Qualified System Plans” while the Retirement Plan BEP and Thrift Plan BEP are sometimes
   referred to herein collectively as “Nonqualified System Plans”. Both Qualified System Plans and
   Nonqualified System Plans compose the Federal Reserve “System Retirement Plans”.
   Retirement Plan
   Petitioner states that the Retirement Plan is a qualified plan under section 401(a) of the
   Internal Revenue Code (“IRC”). The Retirement Plan is comprised of two distinct benefits

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structures — the “Bank Plan” and the “Board Plan” — each of which provides a defined level of
benefit after retirement based on the salary and number of years of service for the Federal Reserve.
Employees of the Board who were hired prior to January 1, 1984, (other than the seven sitting
members of the Board of Governors) participate in the Board Plan while all other Federal Reserve
Employees (other than the seven sitting members of the Board) participate in the Bank Plan.
Employees participating in the Board Plan contribute seven percent of their salary to the Retirement
Plan. There is no contribution requirement for employees in the Bank Plan. Distributions under the
Retirement Plan are all made in an annuity form of payment except for small distributions which are
made in a single lump sum.
Thrift Plan
Petitioner states that the Internal Revenue Service has ruled that the Thrift Plan is a qualified
plan under section 401(a) of the IRC with a qualified cash or deferred arrangement within the
meaning of section 401(k) of the IRC.
The Thrift Plan, among other provisions, provides that an employee of the Federal Reserve
(including members of the Board of Governors) may choose to participate in the Thrift Plan. The
Thrift Plan establishes and maintains a “Plan Account” for each participant which may include a
savings account (employee may make after-tax contributions under section 401(m) of the IRC), a
deductible contribution account (applicable to plan years starting on and after January 1, 1982 and
ending on or before December 31, 1986), a deferred compensation account (employee may make
contributions under section 401(k) of the IRC), an employer contribution account (employer
contributions when employee makes contributions to the savings account and/or deferred
compensation account) and a rollover account (employee is permitted to transfer into the Thrift Plan,
an “eligible rollover distribution”). A participant may direct that a specified percentage (up to
certain statutory limits) of his or her salary be paid into the savings and deferred compensation
accounts maintained under the Thrift Plan. The Federal Reserve will match those contributions up
to a certain level in the employer contribution account. The Thrift Plan permits, under certain
circumstances, three in-service withdrawals per year paid in a lump sum. Such employee
withdrawals are subject to the penalty provisions of section 72(t) of the IRC for early distributions
from qualified retirement plans. Withdrawals from the deferred compensation account and the
employer contribution account are subject to certain other restrictions. The sums that are contributed
and transferred, together with any investment growth, less withdrawals, will then be available to the
employee following his or her termination of service. Distributions to former employees under the
Thrift Plan are made in an annuity form, in a single lump sum, in monthly installments, or with
respect to an “eligible rollover distribution” from the Thrift Plan, paid directly to an eligible
retirement plan, depending upon the election of the member.

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Retirement Plan BEP
Petitioner states that the Retirement Plan BEP is an unfunded nonqualified defined benefit
excess-type pension plan jointly maintained by the Board and the Banks. It is designed to be
complementary to the Retirement Plan. Generally, the Retirement Plan BEP provides eligible
participants and their beneficiaries with supplemental retirement and ancillary death benefits equal
to the difference between the benefits they are entitled to under the Retirement Plan and the benefits
they would have been entitled to under the Retirement Plan but for the application of sections
401(a)(17) and 415 of the IRC. Benefits under the Retirement Plan BEP accrue and vest at the same
time as the corresponding benefit under the Retirement Plan. Benefits under the Retirement Plan
BEP are not payable prior to such participant’s retirement under the Retirement Plan or death, if
earlier.
Thrift Plan BEP
Petitioner states that the Thrift Plan BEP is an unfunded nonqualified defined contribution
excess-type pension plan jointly maintained by the Board and the Banks. It is designed to be
complementary to the Thrift Plan. Generally, the Thrift Plan BEP provides that an account will be
established for each Thrift Plan participant whose employer matching contribution under the Thrift
Plan is limited by application of section 401(a)(17) of the IRC. A participant’s Thrift Plan BEP
account is credited each month with an amount equal to the difference between the employer
matching contribution such participant is credited with under the Thrift Plan for the month and the
employer matching contribution such participant would have been credited with under the Thrift
Plan for the month but for the application of section 401(a)(17) of the IRC. The participant’s Thrift
Plan BEP account is thereafter credited with earnings at the rate of return equal to the rate of return
for the Thrift Plan investments elected by the participant with respect to such participant’s employer
matching contribution account for the same period. Amounts credited to a participant’s Thrift Plan
BEP account vest at the same time as the corresponding employer matching contribution under the
Thrift Plan. A participant’s Thrift Plan BEP account balance is not payable to a participant until
after the participant retires or otherwise terminates employment.
After retirement, the distributions from the Retirement Plan, the Thrift Plan, the Retirement
Plan BEP, if any, and the Thrift Plan BEP, if any, are includible in gross income for federal income
tax purposes.
Discussion
Section 612 of Article 22 of the Tax Law provides that the New York adjusted gross income
of a resident individual means the individual’s federal adjusted gross income with the modifications
specified in such section 612. Section 612(c)(3)(ii) of the Tax Law provides that there shall be

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subtracted from federal adjusted gross income, pensions to officers and employees of the United
States of America, any territory or possession or political subdivision of such territory or possession,
the District of Columbia, or any agency or instrumentality of any one of the foregoing, to the extent
includible in gross income for federal income tax purposes.
Such provision was added in 1989 in response to the United States Supreme Court decision
in Davis v Michigan Department of the Treasury, 109 S Ct 1500, 103 L Ed 2d 891, which held that
states, such as New York, that exempt pensions of their own employees from income taxes must
provide a similar exemption to employees of the federal government. See, TSB-M-89(9)I. The
Court relied on 4 USC §111 which provides as follows: “[t]he United States consents to the taxation
of pay or compensation for personal service as an officer or employee of the United States ... by a
duly constituted taxing authority having jurisdiction, if the taxation does not discriminate against the
officer or employee because of the source of the pay or compensation.”
Section 112.3(c)(1)(i)(b) of the Personal Income Tax Regulations (“Regulations”), provides
that pensions and other retirement benefits (including but not limited to annuities, interest and lump
sum payments) paid to a public officer or public employee of an instrumentality of the United States
is subtracted from federal adjusted gross income in computing New York adjusted gross income.
The federal reserve banks have been deemed to be federal instrumentalities for purposes of
immunity from state taxation. (Lewis v United States, 680 F2d 1239 and Federal Reserve Bank of
Boston v Comm of Corporations & Taxation, 499 F2d 60, after remand, 520 F2d 221.)
On March 23, 1976, the Internal Revenue Service issued a private letter ruling to the
representative of the Federal Reserve Employee Benefits System. The Internal Revenue Service
concluded that the Federal Reserve System is an instrumentality of the United States for purposes
of section 414(d) of the Internal Revenue Code (“IRC”) and that the employee’s deferred
compensation plans established and maintained by the Board of Governors of the Federal Reserve
System, the federal reserve banks and the Office of the Federal Reserve Employees Benefit System,
constitute governmental plans within the meaning of section 414(d) of the IRC and are exempt from
the provisions of Title II of ERISA [Employee Retirement Income Security Act of 1974] to the
extent that governmental plans are exempt. The Internal Revenue Service discussed this issue with
the Office of Employee Benefits Security, Department of Labor and that Office concurred.
The term “pension” is not defined in Article 22 of the Tax Law. However, section 607 of
the Tax Law provides that “[a]ny term used in [Article 22] shall have the same meaning as when
used in comparable context in the laws of the Unites 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 (“IRC”). It was held in Richard J. Alexanderson, Adv Op Comm T&F, March 19,
1985, TSB-A-85(2)I, that payments paid from a plan constituting a qualified pension plan within the

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meaning of section 401 of the IRC would constitute a “pension” within the meaning of section
612(c)(3-a) of the Tax Law.
In Charles E. Rockey, Adv Op Comm T&F, June 29, 1990, TSB-A-90(8)I, it was held that
pension payments from the Federal Reserve Retirement Plan administered by the Office of the
Federal Reserve Employee Benefits System and subject to the direction and control of the Board of
Governors and the federal reserve banks are pension payments paid to an employee of an
instrumentality of the United States, and therefore were exempt from tax pursuant to section
612(c)(3)(ii) of the Tax Law.
In Joseph T. DiGianni, Adv Op Comm T&F, January 21, 1994, TSB-A-94(1)I, the issue was
whether distributions from the Federal Employees’ Thrift Savings Plan (“Plan”) are exempt under
section 612(c)(3) of the Tax Law. The opinion held that distributions to participants who were
covered by the Federal Employees’ Retirement System (“FERS”) were part of the participant’s
pension and exempt pursuant section 612(c)(3)(ii), but distributions to participants who were
covered by the Civil Service Retirement System (“CSRS”) were supplemental to the participant’s
pension and not exempt pursuant to section 612(c)(3)(ii). However, distributions to CSRS
employees did qualify for the up to $20,000 exclusion under section 612(c)(3-a) of the Tax Law.
The distinction was attributable to differences in the provisions of the retirement systems. The
FERS consisted of a combination of social security, a defined benefit plan (basic annuity) and a
defined contribution plan (the Plan). FERS employees automatically received employer
contributions into the Plan, and if the employee elected to make contributions into the Plan, the
government matched, to a certain level, such contributions. Therefore, distributions from the Plan
were part of the FERS employee’s pension. However, the CSRS consisted of a defined benefit plan
(annuity) only. CSRS employees could voluntarily participate in the Plan by making employee
contributions, but the government did not make any contributions into the Plan, and the distributions
were not part of the employee’s pension.
Conclusions
Distributions from the Retirement Plan – As concluded in Charles Rockey, supra, the
Retirement Plan is a pension or other retirement benefit within the meaning of section 612(c)(3)(ii)
of the Tax Law and section 112.3(c)(1)(i)(b) of the Regulations, and the distributions from the
Retirement Plan are exempt from personal income tax pursuant to such section 612(c)(3)(ii) of the
Tax Law.
Distributions from the Thrift Plan – Petitioner states that the Thrift Plan is a qualified plan
under section 401(a) of the IRC and a profit-sharing plan within the meaning of section 401(k) of
the IRC. Where an employee chooses to participate, the Federal Reserve will match the member’s
contributions up to a certain level, similar to the government contributions made in DiGianni, supra,

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for FERS employees. Following Alexanderson, supra, and DiGianni, supra, distributions from the
Thrift Plan, constitute a “pension or other retirement benefit” as contemplated under section
612(c)(3)(ii) of the Tax Law and section 112.3 (c)(1)(i)(b) of the Regulations. Since the distributions
from the Thrift Plan are paid to an employee of an instrumentality of the United States, such
distributions constitute pension or other retirement distributions pursuant to section 612(c)(3)(ii) of
the Tax Law. Accordingly, the distributions from the Thrift Plan (other than in-service withdrawals)
are exempt from personal income tax pursuant to such section 612(c)(3)(ii) of the Tax Law.
Distributions from the Retirement Plan BEP – Petitioner states that the Retirement Plan
BEP is an unfunded nonqualified defined benefit excess-type pension plan that is designed to be
complementary to the Retirement Plan. As such, the Retirement Plan BEP is also a pension or other
retirement benefit for purposes of section 612(c)(3)(ii) of the Tax Law and section 112.3(c)(1)(i)(b)
of the Regulations. Accordingly, distributions from the Retirement Plan BEP are also exempt from
personal income tax pursuant to section 612(c)(3)(ii) of the Tax Law.
Distributions from the Thrift Plan BEP – Petitioner states that the Thrift Plan BEP is an
unfunded nonqualified defined contribution excess-type pension plan that is designed to be
complementary to the Thrift Plan. As such, the Thrift Plan BEP, like the Thrift Plan, is a pension
or other retirement benefit for purposes of section 612(c)(3)(ii) of the Tax Law and section
112.3(c)(1)(i)(b) of the Regulations. Accordingly, like the distributions from the Thrift Plan, the
distributions from the Thrift Plan BEP are exempt from personal income tax pursuant to section
612(c)(3)(ii) of the Tax Law.

DATED: April 12, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

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