Are a retired New York public school teacher's IRC section 403(b) tax-deferred annuity (TDA) distributions exempt from New York personal income tax?

Plain-English summary

New York State United Teachers Benefit Trust, a tax-exempt IRC section 501(c)(5) organization that provides health, welfare, and financial benefits to more than 200,000 members of New York State United Teachers, sponsors two IRC section 403(b) tax-deferred annuity (TDA) programs. Members authorize their school-district employer to deduct pre-tax salary-reduction contributions under Education Law § 3109, and the programs otherwise satisfy all IRC section 403(b) requirements (nontransferable contracts, contribution limits, required minimum distributions after age 70 1/2, withdrawal limits, and rollover provisions). The Trust asked whether distributions from these TDA plans to a retired New York State public school teacher are exempt from New York personal income tax under Tax Law § 612(c)(3)(i).

The Department first distinguished a prior opinion, Robert Weitzman, TSB-A-02(9)I, involving a retired New York City teacher whose TDA distributions were exempt - but that exemption rested on a specific New York City Administrative Code § 13-561 provision covering only the New York City Teachers' Retirement System TDA program, not on Tax Law § 612(c)(3)(i). Because Petitioner's statewide TDA plan is not the NYCTRS program, that separate city-specific exemption does not apply here.

Turning to Tax Law § 612(c)(3)(i) itself, the Department explained that this subtraction covers pensions and retirement benefits paid to public officers and employees of New York State, its subdivisions, or agencies, but only - per 20 NYCRR 112.3(c)(1), as amended in 1994 - to the extent the benefits are actually contributed to (not merely deemed contributed to) by the State, its subdivisions, or agencies. Salary-reduction contributions that a teacher elects to make under Education Law § 3109 are, in substance, the teacher's own foregone salary rather than a benefit actually funded by the State or district.

Accordingly, the Department held that TDA distributions are exempt under Tax Law § 612(c)(3)(i) and 20 NYCRR 112.3(c)(1)(i) only to the extent they are attributable to amounts actually contributed by New York State, its subdivisions, or agencies - not to salary-reduction amounts the employee elected to defer. Where the distributions don't qualify for that exemption, the Department noted a fallback: once the teacher reaches age 59 1/2, those distributions may be combined with any other qualifying pension and annuity income and, together, excluded up to $20,000 under Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2)(i).

What this means for you

Retired public school teachers with a TDA plan

Whether your section 403(b) TDA distributions are fully tax-exempt in New York depends on where the money in the plan came from - not just on whether your employer's plan is authorized under Education Law § 3109. If the funds are traceable to actual contributions by New York State, a school district, or another public subdivision, the distributions qualify for the pension exemption. If the funds are traceable only to your own elective salary-reduction contributions, they do not qualify for that particular exemption.

If your TDA distributions don't qualify for the pension exemption

Once you turn 59 1/2, you can still combine your non-exempt TDA distributions with other qualifying pension and annuity income and exclude up to $20,000 total from New York adjusted gross income, provided the conditions in 20 NYCRR 112.3(c)(2)(i) are met (the income is includible in federal adjusted gross income, received periodically, and attributable to prior personal service under an employer-employee relationship or a deductible retirement plan).

Benefit trusts, plan sponsors, and their advisors

This opinion applies specifically to a statewide TDA plan administered outside New York City; it does not extend the New York City Administrative Code § 13-561 exemption (recognized in TSB-A-02(9)I for the NYCTRS TDA program) to other public school TDA plans. Advisors should track the source of TDA plan funds - actual employer/district contributions versus employee salary reductions - to determine which exemption, if any, applies to a given distribution.

Common questions

Q: Are all IRC section 403(b) TDA distributions to retired New York public school teachers exempt from state income tax?
A: No. They are exempt as pensions under Tax Law § 612(c)(3)(i) only to the extent actually contributed to by New York State, its subdivisions, or agencies - not simply because the plan is authorized under Education Law § 3109.

Q: How is this different from the New York City teachers' TDA program?
A: The New York City Teachers' Retirement System TDA program is exempt under a specific provision, New York City Administrative Code § 13-561, as recognized in TSB-A-02(9)I. That city-specific exemption does not extend to other public school TDA plans, including Petitioner's statewide program.

Q: What happens if the TDA distributions don't qualify for the section 612(c)(3)(i) pension exemption?
A: A retired teacher who has reached age 59 1/2 may combine the distributions with other qualifying pension and annuity income and exclude up to $20,000 total under Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2)(i).

Q: What's the difference between benefits "actually contributed" and "merely deemed contributed" by the State?
A: Under 20 NYCRR 112.3(c)(1), as amended in 1994, only amounts genuinely funded by the State, a subdivision, or an agency count toward the pension exemption; salary-reduction contributions that represent an employee's own foregone salary do not.

Citations and references

• Tax Law § 612(c)(3)(i) - subtraction for pensions of New York State and local government officers and employees
• Tax Law § 612(c)(3-a) - up to $20,000 subtraction for pensions and annuities once an individual reaches age 59 1/2
• 20 NYCRR 112.3(c)(1) - pension modification limited to benefits actually (not merely deemed) contributed by New York State, its subdivisions, or agencies
• 20 NYCRR 112.3(c)(2)(i) - conditions for the $20,000 pension and annuity exclusion
• Education Law § 3109 - authorizes school district salary-reduction agreements for tax-deferred annuities
• IRC § 403(b) - governs tax-deferred annuity plans for public school and other eligible employees
• Robert Weitzman, TSB-A-02(9)I (Dec. 16, 2002) - distinguished; New York City TDA exemption rests on NYC Administrative Code § 13-561, not Tax Law § 612(c)(3)(i)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a05_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(3)I
Income Tax
April 27, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I040507B

On May 7, 2004, a Petition for Advisory Opinion was received from New York State
United Teachers Benefit Trust, c/o Gerald John DeWolf, Esq., New York State United Teachers
Special Counsel, 800 Troy-Schenectady Road, Latham, New York 12110-2455.
The issue raised by Petitioner, New York State United Teachers Benefit Trust, is whether
a retired New York State public school teacher’s Internal Revenue Code (IRC) section 403(b) tax
deferred annuity (TDA) plan distributions are exempt from New York personal income tax,
pursuant to section 612(c)(3)(i) of the Tax Law, where the TDA plan salary reduction
contributions were made pursuant to section 3109 of the New York Education Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a tax exempt entity under IRC section 501(c)(5). Petitioner offers a wide
variety of health and welfare and financial related benefits to the members of the New York State
United Teachers, a statewide voluntary membership association. Petitioner sponsors two TDA
programs for its members. In excess of 200,000 members are eligible to participate in one or
both of the TDA programs.
Both of Petitioner’s TDA programs are authorized by and comply with all IRC section
403(b) rules and regulations. The annuity contracts within such programs:
(a) are nontransferable by the employee;
(b) specify the dollar limit on salary reduction contributions;
(c) require minimum distributions after age 70 ½;
(d) limit withdrawals of accumulations attributable to salary reduction
contributions; and
(e) provide for the direct rollover of eligible rollover distributions;
all in accordance with the provisions of IRC section 403(b).
By signing a salary reduction agreement, eligible participants authorize their employer to
deduct pre-tax contributions from their salary (elective salary reduction contributions). The

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amount deducted is put into the TDA and is invested for a participant’s retirement. If the
participant’s employer permits, he or she may participate in both TDA programs provided that
maximum allowable contributions are not exceeded. Eligible participants’ employers may also
make non-elective and matching contributions.
Applicable law and regulations
IRC section 403(b)(1) contains employee annuity provisions for a beneficiary under an
annuity purchased by a public school, and provides, in part:
General rule. If (A) an annuity contract is purchased (i) for an employee by an employer described in section 501(c)(3) which is
exempt from tax under section 501(a),
(ii) for an employee (other than an employee described in clause (i)), who
performs services for an educational organization described in section 170(b)(1)(A)(ii),
by an employer which is a State , a political subdivision of a State, or an agency or
instrumentality of any one or more of the foregoing . . .
*

*

*

(B) such annuity contract is not subject to subsection (a),
(C) the employee’s rights under the contract are nonforfeitable, except for failure
to pay future premiums, [and]
*

*

*

(E) in the case of a contract purchased under a salary reduction agreement, the
contract meets the requirements of section 401(a)(30),
then contributions and other additions by such employer for such annuity contract shall
be excluded from the gross income of the employee for the taxable year to the extent that
the aggregate of such contributions and additions (when expressed as an annual addition
(within the meaning of section 415(c)(2))) does not exceed the applicable limit under
section 415. The amount actually distributed to any distributee under such contract shall
be taxable to the distributee (in the year in which so distributed) under section 72
(relating to annuities). . . .

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Section 3109 of the Education Law provides, in part:
Each board of education, trustee or trustees in any school district, and each board
of cooperative educational services or county vocational education and extension board,
in its discretion, may enter into a written agreement with any employee of such school
district or board to reduce the annual salary as otherwise payable by law of such
employee for the purpose of purchasing an annuity or investing in a custodial account as
permitted under section 403(b) of the United States Internal Revenue Code. . . .
Section 612(a) of the Tax Law provides:
General. The New York adjusted gross income of a resident individual means his
federal adjusted gross income as defined in the laws of the United States for the taxable
year, with the modifications specified in this section.
Section 612(c) of the Tax Law provides, in part:
Modifications reducing federal adjusted gross income. There shall be subtracted
from federal adjusted gross income:
*

*

*

(3)(i) Pensions to officers and employees of this state, its subdivisions and
agencies, to the extent includible in gross income for federal income tax purposes;
*

*

*

(3-a) Pensions and annuities received by an individual who has attained the age of
fifty-nine and one-half, not otherwise excluded pursuant to paragraph three of this
subsection, to the extent includible in gross income for federal income tax purposes, but
not in excess of twenty thousand dollars, which are periodic payments attributable to
personal services performed by such individual prior to his retirement from employment,
which arise (i) from an employer-employee relationship or (ii) from contributions to a
retirement plan which are deductible for federal income tax purposes. However, the term
"pensions and annuities" shall also include distributions received by an individual who
has attained the age of fifty-nine and one-half from an individual retirement account or an
individual retirement annuity, as defined in section four hundred eight of the internal
revenue code, and distributions received by an individual who has attained the age of
fifty-nine and one-half from self-employed individual and owner-employee retirement
plans which qualify under section four hundred one of the internal revenue code, whether
or not the payments are periodic in nature. Nevertheless, the term "pensions and
annuities" shall not include any lump sum distribution, as defined in subparagraph (A) of

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paragraph four of subsection (e) of section four hundred two of the internal revenue code
and taxed under section six hundred three of this article. Where a husband and wife file a
joint state personal income tax return, the modification provided for in this paragraph
shall be computed as if they were filing separate state personal income tax returns.
Where a payment would otherwise come within the meaning of the term "pensions and
annuities" as set forth in this paragraph, except that such individual is deceased, such
payment shall, nevertheless, be treated as a pension or annuity for purposes of this
paragraph if such payment is received by such individual's beneficiary.
Section 112.3(c)(1) of the New York State Personal Income Tax Regulations
(Regulations) provides:
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 (Tax Law, §612(c)(3)).
(i) 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:
(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 or the
beneficiary of a deceased public officer or deceased public employee of New York State,
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 or the
beneficiary of a deceased public officer or deceased 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.
(ii) This paragraph shall also apply to distributions paid in a taxable year prior to
retirement to public officers and public employees which represent a return of
contributions to the applicable public retirement program.
(iii) The provisions of this paragraph can be illustrated by the following examples:

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Example 1: A retired employee of New York State receives a pension which is
taxed under the Internal Revenue Code as annuity income. Since the pension of a retired
New York State employee is exempt from New York State personal income tax under
New York State law, the amount included in Federal adjusted gross income on account of
this pension is subtracted in determining such employee's New York adjusted gross
income.
Example 2: A New York State employee leaves state service prior to vesting in
the New York State Employee's Retirement System. Contributions made by or on behalf
of such employee, as well as all investment earnings accumulated thereon, are to be
subtracted in determining such employee's New York adjusted gross income.
Example 3: A retired Federal employee receives a pension which is taxed under
the Internal Revenue Code as annuity income. Since the pension of a retired Federal
employee is exempt from New York State personal income tax under New York State
law, the amount included in Federal adjusted gross income on account of this pension is
subtracted in determining such employee's New York adjusted gross income.
Example 4: A retired employee of the State University of New York who elected
to participate in the applicable Optional Retirement Program authorized under the
Education Law receives a pension, based upon such employee's public service, which is
taxed under the Internal Revenue Code as annuity income. Since such pension income is
exempt from New York State personal income tax under New York State law because
such pension was actually contributed to by New York State, the amount included in
Federal adjusted gross income on account of this pension is subtracted in determining
such employee's New York adjusted gross income.
Example 5: A retired employee of a public benefit corporation receives a pension
from a fund which was not contributed to by New York State, any of its political
subdivisions or agencies or the Federal government and which is taxed under the Internal
Revenue Code as annuity income. Since such pension income is not exempt from
New York State personal income tax under New York State law because such pension
was not actually contributed to by New York State, any of its political subdivisions or
agencies or the Federal government, the amount included in Federal adjusted gross
income on account of this pension is not subtracted in determining such employee's
New York adjusted gross income and is therefore included in such employee's New York
adjusted gross income.
Section 112.3(c)(2)(i) of the Regulations provides, in part:
Pension and annuity income not subject to the modification referred to in
paragraph (1) of this subdivision and not in excess of $20,000, received by an individual

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may be subtracted in determining New York adjusted gross income providing 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
where otherwise provided in this paragraph);
(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.,
individual retirement account [IRA] or self-employed retirement [Keogh]); and
(d) such individual receiving the pension and annuity income must be 59 ½ years
of age or over.
Opinion
Article 16, section 5 of the New York State Constitution provides that "All salaries,
wages and other compensation, except pensions, paid to officers and employees of the state and
its subdivisions and agencies shall be subject to taxation."
Pursuant to section 3109 of the Education Law, a person employed by the Board of
Education, a trustee or trustees in any school district, or by the Board of Cooperative Educational
Services or County Vocational Education and Extension Board, may agree to reduce his or her
annual salary and become a participant in a tax deferred annuity program. Petitioner’s TDA
programs are authorized by section 3109 of the Education Law and meet the requirements of
IRC section 403(b).
In Robert Weitzman, Adv Op Comm T&F, December 16, 2002, TSB-A-02(9)I, the issue
was whether distributions from an IRC 403(b) TDA plan were exempt from New York State
personal income tax pursuant to section 612(c)(3)(i) of the Tax Law. The petitioner was a retired
high school teacher from the Board of Education of the City of New York. Pursuant to section
3109-A of the Education Law, a person employed by the Board of Education of the City of
New York may agree to reduce his or her annual salary and become a participant in a tax
deferred annuity program. The New York City Teachers’ Retirement System (NYCTRS) TDA
program meets the requirements of IRC section 403(b) and is maintained pursuant to section
13-582 of the Administrative Code of the City of New York (New York Administrative Code).
The distributions from that plan are specifically exempt from New York State and New York
City personal income taxes pursuant to section 13-561 of the New York Administrative Code,

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which was enacted by the New York State Legislature. In the Weitzman opinion, it was
determined that since the distributions to the petitioner are exempt pursuant to section 13-561 of
the New York Administrative Code, it is not necessary to consider whether the provisions of
section 612(c)(3)(i) of the Tax Law apply to such distributions.
However, Petitioner’s TDA plan in the present case is distinguished from a retired
New York City public school teacher’s IRC 403(b) TDA plan. The exemption from New York
State personal income tax provided by section 13-561 of the New York Administrative Code
applies only to distributions from the NYCTRS TDA program. This exemption does not apply
to distributions made to a retired New York State public school teacher under Petitioner’s TDA
plan.
Section 612(c)(3) of the Tax Law exempts from personal income tax pensions paid to
officers and employees of New York State, its subdivisions and agencies. Section 112.3(c)(1) of
the Regulations relates to the subtraction modification for pensions paid to public officers and
public employees of New York State, its political subdivisions or agencies or the federal
government. On August 1, 1994, section 112.3(c)(1) of the Regulations was amended to clarify
that pensions and other retirement benefits paid would qualify for the modification if they relate
to services performed as a public officer or public employee of, and include amounts actually
contributed by, the 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) of the Regulations provide
that when an individual reaches 59½ years of age, pensions and annuities not otherwise excluded
under section 612(c)(3) received by the individual, but not in excess of $20,000, may be
subtracted from federal adjusted gross income when computing New York adjusted gross income
if certain conditions are met.
Where the State, its political subdivisions or agencies, or the federal government, do
not make any contribution to the TDA plan, distributions received by a retired New York
State public school teacher do not constitute a pension or retirement benefit exempt from
New York personal income tax, pursuant to section 612(c)(3)(i) of the Tax Law and section
112.3(c)(1)(i) of the Regulations.
However, section 612(c)(3-a) of the Tax Law and section 112.3(c)(2) of the Personal
Income Tax Regulations provide that when a retired public school teacher reaches the age of
59 ½ years, distributions received from Petitioner’s TDA programs which do not qualify for
exemption under section 612(c)(3) of the Tax Law may be added to the individual’s other
pension and annuity income, if any, that meets the conditions of such section 612(c)(3-a) and
section 112.3(c)(2) of the Regulations for purposes of computing the $20,000 pension and
annuity income modification. The total, but not in excess of $20,000, may be subtracted from
federal adjusted gross income when computing New York adjusted gross income.

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If Petitioner’s TDA plan distributions received by a retired New York State public school
teacher are attributable to amounts actually contributed (rather than merely being deemed to be
contributed) by New York State, its political subdivisions or agencies, then such distributions
constitute a pension or retirement benefit exempt from New York personal income tax, pursuant
to section 612(c)(3)(i) of the Tax Law and section 112.3(c)(1)(i) of the Regulations.

DATED: April 27, 2005

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.