Do distributions from the New York State Deferred Compensation Plan, a governmental section 457 deferred compensation plan, qualify for New York's $20,000 pension and annuity exclusion starting in 2002, and can they be rolled over tax-free into an IRA?

Plain-English summary

Edward B. Gorewitz, a retired New York State employee, participated in the New York State Deferred Compensation Plan - a governmental deferred compensation plan established under section 457 of the Internal Revenue Code (IRC). He expected to begin taking distributions in June 2002 and asked the Department two questions: first, whether those distributions would qualify for New York's pension and annuity exclusion of up to $20,000 under Tax Law section 612(c)(3-a); and second, whether he could roll the distributions tax-free into an individual retirement account (IRA), and whether distributions later taken from that IRA would also qualify for the exclusion.

The Department explained that, before 2002, distributions from the Plan did not qualify as pension and annuity income under section 612(c)(3-a) because, under federal regulations then in effect, section 457 government plan distributions were treated as wages rather than as a pension or annuity for federal income tax purposes (citing its own prior opinion, TSB-A-88-(4)I). The Plan's distributions also never qualified for the separate, narrower exclusion in Tax Law section 612(c)(3) for pensions paid to New York public officers and employees (per TSB-M-85-(16)I), because that exclusion requires funds actually contributed by the government employer rather than by the employee.

That changed with the federal Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Public Law 107-16, which added IRC section 3401(a)(12)(E), removing section 457 government plan distributions from the definition of "wages" for federal tax purposes, effective January 1, 2002. Because New York's Tax Law generally borrows federal definitions under Tax Law section 607(a), this reclassification meant that, starting January 1, 2002, distributions from the Plan are treated as pension and annuity income eligible for the section 612(c)(3-a) exclusion. EGTRRA also added IRC section 457(e)(16), a new rollover rule permitting tax-free trustee-to-trustee transfers of eligible plan distributions into an IRA or other eligible retirement plan.

The Department concluded that Gorewitz's Plan distributions, beginning in 2002, would be treated as pension and annuity income under section 612(c)(3-a), excludable up to $20,000 per year if he meets the statute's conditions. If instead he rolls a distribution over into an IRA under the new IRC section 457(e)(16) procedure, the rollover itself is not taxed; distributions later taken from the IRA are then treated as pension and annuity income under section 612(c)(3-a), subject to the same $20,000 annual cap (combined with any other section 612(c)(3-a) pension and annuity income he receives that year).

What this means for you

Retired public employees receiving section 457 plan distributions

If you are a retired New York State or local government employee receiving distributions from a governmental section 457 deferred compensation plan, those distributions are treated as pension and annuity income under Tax Law section 612(c)(3-a) for amounts received on or after January 1, 2002 - they were not treated that way for earlier years. To exclude up to $20,000 per year, you must be at least 59 1/2 years old, the distributions must be made in periodic payments, and they must be included in your federal adjusted gross income.

Rolling section 457 distributions into an IRA

If you transfer your section 457 plan distribution directly into an IRA using the trustee-to-trustee rollover procedure added by EGTRRA (IRC section 457(e)(16)), the rollover is not taxed in the year of the transfer. When you later take distributions from that IRA, those distributions are treated as pension and annuity income under section 612(c)(3-a) and can be excluded up to $20,000 for the year, provided you are 59 1/2 or older and the amounts are included in federal adjusted gross income. Remember that the $20,000 cap applies to your combined section 612(c)(3-a) pension and annuity income for the year, not separately to each source.

Accountants and tax professionals

When advising clients who receive section 457 government plan distributions, note the January 1, 2002 dividing line: pre-2002 distributions were treated as wages, not pension income, and did not qualify for the section 612(c)(3-a) exclusion, while post-2001 distributions do qualify if the statutory conditions are met. Also keep the section 612(c)(3) public-employee pension exclusion distinct from section 612(c)(3-a) - this Plan's distributions have never qualified for the former.

Common questions

Q: Do New York State Deferred Compensation Plan distributions qualify for the $20,000 pension exclusion?
A: Yes, but only for distributions received on or after January 1, 2002. Before that date, federal law treated these section 457 government plan payments as wages, not pension or annuity income, so they did not qualify under Tax Law section 612(c)(3-a).

Q: What conditions must be met to exclude up to $20,000?
A: Under section 612(c)(3-a) and 20 NYCRR 112.3(c)(2)(i), the recipient must be at least 59 1/2 years old, the pension and annuity income must be received in periodic payments (except from an IRA or Keogh plan), it must be included in federal adjusted gross income, and it must be attributable to personal services performed before retirement.

Q: Can section 457 plan distributions be rolled over into an IRA tax-free?
A: Yes. EGTRRA added IRC section 457(e)(16), which allows an eligible rollover distribution from a governmental section 457 plan to be transferred to an IRA or other eligible retirement plan without being included in gross income for the year of the rollover.

Q: Are distributions later taken from that IRA also eligible for the $20,000 exclusion?
A: Yes. Once rolled into an IRA, subsequent IRA distributions are treated as pension and annuity income under Tax Law section 612(c)(3-a) and may be excluded up to $20,000 (combined with any other section 612(c)(3-a) income received that year), provided the recipient meets the age, inclusion, and other conditions.

Q: Does this Plan also qualify for New York's separate public-employee pension exclusion?
A: No. The Department noted that, per TSB-M-85-(16)I, distributions from the New York State Deferred Compensation Plan do not qualify for the section 612(c)(3) exclusion for pensions paid to New York public officers and employees; only the section 612(c)(3-a) exclusion is available.

Citations and references

• Tax Law § 607(a) - terms used in the personal income tax article have the same meaning as under federal income tax law unless a different meaning is required
• Tax Law § 612(c)(3) - subtraction modification for pensions paid to public officers and employees of New York, its subdivisions, or the federal government
• Tax Law § 612(c)(3-a) - subtraction modification of up to $20,000 for pension and annuity income not covered by section 612(c)(3)
• 20 NYCRR 112.3(c)(1) - conditions for the public-employee pension exclusion under section 612(c)(3)
• 20 NYCRR 112.3(c)(2)(i) - conditions (age 59 1/2, periodic payments, inclusion in federal AGI, attributable to personal services) for the $20,000 pension and annuity exclusion under section 612(c)(3-a)
• IRC § 457(a), (b), (e)(1) - taxation and definition of eligible deferred compensation plans of governmental and tax-exempt employers
• IRC § 457(e)(16) (added by EGTRRA) - tax-free rollover of eligible governmental section 457 plan distributions to an eligible retirement plan
• IRC § 402(c)(4), (c)(8)(B) - definitions of "eligible rollover distribution" and "eligible retirement plan"
• IRC § 3401(a)(12)(E) (added by EGTRRA) - excludes governmental section 457 plan distributions from the definition of "wages," effective January 1, 2002
• TSB-M-85-(16)I (December 27, 1985) - Deferred Compensation Plan distributions do not qualify for the section 612(c)(3) public pension exclusion
• TSB-A-88-(4)I, Richard C. Spaulding (April 12, 1988) - pre-2002 section 457 government plan distributions were wages, not pensions or annuities, for federal tax purposes

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a02_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(2)I
Income Tax
July 24, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I010726A

On July 26, 2001, a Petition for Advisory Opinion was received from Edward B. Gorewitz,
135 Ashland Place, Apt 9-A, Brooklyn, New York 11201.
The issues raised by Petitioner, Edward B. Gorewitz, are:

1. Whether distributions from a section 457 of the Internal Revenue Code deferred
   compensation plan qualify for the pension and annuity exclusion up to $20,000,
   under section 612(c)(3-a) of the Tax Law, beginning in 2002 as a result of the
   Federal Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law
   107-16.
2. Whether (a) such distributions may be rolled over into an individual retirement
   account (IRA) tax-free, and (b) distributions made from the IRA will qualify for the
   exclusion under such section 612(c)(3-a) of the Tax Law.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   Petitioner is a retired New York State employee who is a participant in the New York State
   Deferred Compensation Plan which is a government deferred compensation plan under section 457
   of the Internal Revenue Code (“IRC”). Petitioner expects to begin taking distributions from the plan
   effective June 2002.
   Applicable Law and Regulations
   Section 607(a) of the Tax Law provides that for purposes of New York personal income tax,
   “[a]ny term used in this article shall have the same meaning as when used in a comparable context
   in the laws of the United States relating to federal income taxes, unless a different meaning is clearly
   required but such meaning shall be subject to the exceptions or modifications prescribed in this
   article or by statute....”
   Federal Law
   Section 457(a) of the IRC provides:
   (1) In general. – Any amount of compensation deferred under an eligible
   deferred compensation plan, and any income attributable to the amounts so deferred,

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shall be includible in gross income only for the taxable year in which such
compensation or other income —
(A) is paid to the participant or other beneficiary, in the case of a plan
of an eligible employer described in subsection (e)(1)(A), and
(B) is paid or otherwise made available to the participant or other
beneficiary, in the case of a plan of an eligible employer described in
subsection (e)(1)(B).
(2) Special rule for rollover amounts. – To the extent provided in section
72(t)(9), section 72(t) shall apply to any amount includible in gross income under
this subsection.
Section 457(b) of the IRC provides that the term “eligible deferred compensation plan”
means “a plan established and maintained by an eligible employer (1) in which only individuals who
perform service for the employer may be participants.”
Section 457(e)(1) of the IRC provides that the term “eligible employer” means:
(A) a State, political subdivision of a State, and any agency or instrumentality
of a State or political subdivision of a State, and
(B) any other organization (other than a governmental unit) exempt from tax
under this subtitle [A].
The Federal Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), in
part, amended sections 402 (taxability of beneficiary of employees’ trust), 457 (deferred
compensation plans) and 3401 (defining wages for withholding tax purposes) of the IRC to allow
for trustee-to-trustee transfers between eligible deferred compensation plans established and
maintained by eligible employers under section 457(e)(1)(A) (“section 457 government plans”) and
eligible retirement plans under section 402(c)(8)(B) of the IRC, and to change the characterization
of distributions from section 457 government plans, effective January 1, 2002.
EGTRRA added section 457(e)(16) of the IRC, which provides, in pertinent part:
Rollover Amounts. – (A) General Rule. – In the case of an eligible deferred
compensation plan established and maintained by an employer described in
subsection (e)(1)(A) [of section 457] if –

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(i) any portion of the balance to the credit of an employee in such plan is paid
to such employee in an eligible rollover distribution (within the meaning of section
402(c)(4)),
(ii) the employee transfers any portion of the property such employee
receives in such distribution to an eligible retirement plan described in section
402(c)(8)(B), and
(iii) in the case of a distribution of property other than money, the amount so
transferred consists of the property distributed,
then such distribution (to the extent so transferred) shall not be includible in
gross income for the taxable year in which paid....
Section 402(c)(4) of the IRC defines the term “eligible rollover distribution,” in part, as
follows:
For purposes of this subsection, the term “eligible rollover distribution”
means any distribution to an employee of all or any portion of the balance to the
credit of the employee in a qualified trust; except that such term shall not include –
(A) any distribution which is one of a series of substantially equal
periodic payments (not less frequently than annually) made –
(i) for the life ... of the employee ..., or
(ii) for a specified period of 10 years or more,
(B) any distribution to the extent such distribution is required under
section 401(a)(9) , and
(C) any distribution which is made upon hardship of the employee.
Section 402(c)(8)(B) of the IRC provides that the term “eligible retirement plan” means:
(i) an individual retirement account described in section 408(a),
(ii) an individual retirement annuity described in section 408(b) (other than
an endowment contract),
(iii) a qualified trust,

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(iv) an annuity plan described in section 403(a),
(v) an eligible deferred compensation plan described in section 457(b) which
is maintained by an eligible employer described in section 457(e)(1)(A), and
(vi) an annuity contract described in section 403(b).
EGTRRA added section 3401(a)(12)(E) of the IRC. Section 3401(a) of the IRC provides,
in part:
Wages. – For purposes of this chapter, the term “wages” means all
remuneration (other than fees paid to a public official) for services performed by an
employee for his employer, including the cash value of all remuneration (including
benefits) paid in any medium other than cash; except that such term shall not include
remuneration paid
*

*

*

(12) to, or on behalf of, an employee or his beneficiary
*

*

*

(E) under or to an eligible deferred compensation plan which, at the time of
such payment, is a plan described in section 457(b) which is maintained by an
eligible employer described in section 457(e)(1)(A)....
New York Law and Regulations
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) of the Tax Law and section 112.3(c)(1) of the Personal Income Tax Regulations
(“Regulations”) contain a subtraction modification for 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 112.3(c)(1)(i) of the Regulations provides, in part:
Retirement benefits provided for in clauses (a) and (b) of this subparagraph
which are included in Federal adjusted gross income, relate to services performed as
public officers or public employees and all or a portion of which are actually
contributed to (rather than merely being deemed contributed to) by New York State,
its political subdivisions or agencies or the Federal government, shall be subtracted
in computing New York adjusted gross income:

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(a) 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 New York, its political subdivisions or agencies;
(b) 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 the United States, its territories or possessions, or
political subdivisions of such territories or possessions, the District of
Columbia, or any agency or instrumentality of any one of the foregoing.
Section 612(c)(3-a) of the Tax Law contains a subtraction 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 that
are exempt pursuant to section 612(c)(3) of the Tax Law.
Section 612(c)(3-a) of the Tax Law and section 112.3(c)(2)(i) of the 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 provided the following conditions
are met:
(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 (e.g., IRA or Keogh); and
(d) such individual receiving the pension and annuity income must be 59 ½
years of age or over.
Opinion
The New York State Deferred Compensation Plan was established and is maintained under
the provisions of section 457 of the IRC for public employees of New York State and its political
subdivisions. Pursuant to Department of Taxation and Finance Technical Services Bureau

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Memorandum TSB-M-85-(16)I, December 27, 1985, distributions from the New York State
Deferred Compensation Plan do not qualify for the exclusion for New York State pension and other
retirement benefits that is contained in section 612(c)(3) of the Tax Law.
Further, prior to January 1, 2002, the effective date of the pertinent EGTRRA provisions,
distributions from the New York State Deferred Compensation Plan were not considered to be
pension and annuity income under section 612(c)(3-a) of the Tax Law. Pursuant to section 607(a)
of the Tax Law, terms have the same meaning for personal income tax purposes as under the IRC,
and prior to January 1, 2002, such distributions were considered to be wages under section
35.3405-1T, A-23 of the Treasury Regulations, and did not qualify as pensions or annuities for
federal income tax purposes. (See Richard C. Spaulding, Adv Op Comm T&F, April 12, 1988,
TSB-A-88-(4)I.)
However, as a result of EGTRRA’s addition of section 3401(a)(12)(E) of the IRC, effective
January 1, 2002, section 457 government plan distributions are excluded from the definition of the
term “wages” for federal income tax purposes. Therefore, effective January 1, 2002, distributions
from the New York State Deferred Compensation Plan are treated as pension and annuity income
under such section 612(c)(3-a) of the Tax Law. Further, effective January 1, 2002, a distribution
that meets the rollover requirements of new section 457(e)(16) of the IRC will not be subject to tax
under section 612 of the Tax Law for the year of rollover. When funds are rolled over from the New
York State Deferred Compensation Plan to either an IRA or other qualified plan, distributions made
from the IRA or other qualified plan will be treated as pension and annuity income under section
612(c)(3-a) of the Tax Law in the year of distribution.
Accordingly, with respect to Issue 1, Petitioner’s distributions from the New York State
Deferred Compensation Plan will be treated as pension and annuity income under section 612(c)(3­
a) of the Tax Law. If Petitioner meets all of the conditions of such section 612(c)(3-a), Petitioner’s
distributions from the New York State Deferred Compensation Plan, up to $20,000 for a taxable
year, may be excluded when Petitioner computes his New York adjusted gross income under section
612 of the Tax Law. To meet the conditions of section 612(c)(3-a) of the Tax Law, Petitioner must
be at least 59 ½ years of age, the distributions must be made in periodic payments, and the
distributions must be included in federal adjusted gross income.
With respect to Issue 2, where Petitioner’s distributions from the New York State Deferred
Compensation Plan are rolled over into an IRA pursuant to the provisions of section 457(e)(16) of
the IRC, such distributions are not subject to tax for the taxable year of the rollover. For the taxable
year that Petitioner receives distributions from such IRA, the distributions will be treated as pension
and annuity income under section 612(c)(3-a) of the Tax Law. If Petitioner is 59 ½ years of age
when he receives the distributions from such IRA, and the distributions are included in federal
adjusted gross income, Petitioner may exclude up to $20,000 of such distributions, pursuant to
section 612(c)(3-a) of the Tax Law, when he computes his New York adjusted gross income under
section 612 of the Tax Law. Note that for any taxable year that Petitioner also has other pension and

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annuity income described in section 612(c)(3-a) of the Tax Law that is eligible for exclusion, the
total exclusion may not exceed $20,000.

DATED: July 24, 2002

NOTE:

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

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