Does an in-service hardship distribution from the Federal Employees' Thrift Savings Plan qualify for New York's income subtraction for federal pensions?

Plain-English summary

The petitioner is a U.S. Postal Service employee and a participant in the Federal Employees' Retirement System (FERS). Through the Federal Employees' Thrift Savings Plan - a FERS component funded by contributions from both the employer and the employee - the petitioner requested and received an in-service hardship distribution of $125,000. The petitioner asked whether that in-service distribution qualifies for New York's income subtraction modification for federal pensions under Tax Law § 612(c)(3)(ii).

The Department concluded that it does. Tax Law § 612(c)(3)(ii) allows officers and employees of the United States (or any of its agencies or instrumentalities) to subtract their federal pension income from federal adjusted gross income when computing New York adjusted gross income. Regulation 22 NYCRR 112.3(c)(1)(i)(b) explains that this subtraction reaches "pension and other retirement benefits," expressly including annuities, interest, and lump-sum payments paid to a federal officer or employee.

The Department then reasoned by analogy to New York's own state employees' retirement system. Retirement and Social Security Law § 110 exempts benefits paid from that system - including in-service distributions - from state and municipal tax. Because New York exempts its own employees' in-service retirement distributions, the U.S. Supreme Court's decision in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), requires New York to extend the same tax treatment to federal employees. Davis relied on 4 U.S.C. § 111, under which the United States consents to state taxation of federal pay only if that taxation does not discriminate against federal officers or employees based on the source of their compensation.

Applying that principle, the Department held that since distributions from the New York State Employees' Retirement System are exempt from state income tax, the petitioner's in-service distribution from the Federal Employees' Thrift Savings Plan must receive the same exemption - so it qualifies for the Tax Law § 612(c)(3)(ii) subtraction.

What this means for you

Federal employees receiving in-service Thrift Savings Plan distributions

If you're a federal officer or employee (including a U.S. Postal Service employee) participating in the Federal Employees' Retirement System, an in-service distribution from the Thrift Savings Plan - such as a hardship withdrawal taken while you're still working - qualifies for New York's Tax Law § 612(c)(3)(ii) subtraction, just as a regular post-employment federal pension would.

Accountants and tax professionals

When a client receives any distribution (in-service or otherwise) from a federal retirement plan, the fact that New York exempts equivalent in-service distributions to its own state employees under Retirement and Social Security Law § 110 means the federal employee is entitled to parallel treatment under Davis v. Michigan Department of Treasury. Don't assume the § 612(c)(3)(ii) subtraction is limited to post-retirement pension payments.

Common questions

Q: Does the subtraction only apply to pensions received after someone retires from federal service?
A: No. This opinion holds that in-service distributions - taken while the employee is still working - also qualify, because New York exempts equivalent in-service distributions paid to its own state retirement system participants.

Q: Why does a decision about the New York State Employees' Retirement System matter to a federal employee?
A: Under Davis v. Michigan Department of Treasury, a state that exempts its own employees' pensions from income tax must give the same exemption to federal employees' pensions. Because Retirement and Social Security Law § 110 exempts in-service distributions to New York state employees, that exemption must extend to federal employees under Tax Law § 612(c)(3)(ii).

Q: What kind of distribution was actually at issue in this ruling?
A: A $125,000 in-service hardship distribution the petitioner, a U.S. Postal Service employee, received from the Federal Employees' Thrift Savings Plan.

Q: Does it matter that the Thrift Savings Plan is funded by both employer and employee contributions?
A: The opinion notes this fact as part of describing the plan, but the Department's conclusion turns on the plan being part of the Federal Employees' Retirement System and the parity required between federal and state employee benefits, not on the funding source.

Citations and references

• Tax Law § 612(c)(3)(ii) - subtraction from federal gross income for pensions paid to U.S. officers and employees (or agencies/instrumentalities of the U.S.)
• 22 NYCRR 112.3(c)(1)(i)(b) - regulation explaining the § 612(c)(3)(ii) subtraction, covering annuities, interest, and lump-sum payments
• Retirement and Social Security Law § 110 - exempts New York state employees' retirement benefits, including in-service distributions, from state and municipal tax
• Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989) - U.S. Supreme Court holding that a state exempting its own employees' pensions must similarly exempt federal employees' pensions
• 4 U.S.C. § 111 - federal consent to state taxation of federal pay, conditioned on nondiscrimination based on the source of compensation

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a10_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(8)I
Income Tax
October 12, 2010

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I100419B

The petition asks whether the in-service distributions that name redacted (Petitioner) received from
the Federal Employees’ Retirement System qualify for the income subtraction modification under Tax Law
§612(c)(3)(ii).
We conclude that the in-service distributions Petitioner received from the Federal Employees’
Retirement System qualify for the income subtraction modification under Tax Law §612(c)(3)(ii).
Facts
Petitioner is a US Postal employee and is a participant in the Federal Employees’ Retirement
System. Petitioner requested and received an in-service hardship distribution of $125,000 from the Federal
Employees’ Thrift Savings Plan. The Thrift Savings Plan is part of the Federal Employees’ Retirement
System and is funded by contributions from both the employer and the participating employees.
Analysis
Tax Law §612(c)(3)(ii) provides a subtraction from federal gross income of pensions to officers and
employees of the United States of America, … or any agency or instrumentality of any one of the foregoing,
to the extent includible in gross income for federal income tax purposes (emphasis added). Regulation 22
NYCRR 112.3(c)(1)(i)(b), which explains the income subtraction under Tax Law §612(c)(3)(ii), states that
“pension 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 … or any agency or instrumentality
of any one of the forgoing” (emphasis added). Additionally, §110 of the Retirement and Social Security
Law, which covers the state employees’ retirement system, provides that “the right of a person to a pension, a
pension-providing-for-increased-take-home-pay ... any other benefit… [A]re hereby exempt from any state
or municipal tax, except the estate tax.…”(emphasis added).
While Tax Law §612(c)(3)(ii) states that pensions of officers and employees of the United States of
America are to be subtracted from federal adjusted gross income in determining New York adjusted gross
income, Retirement and Social Security Law §110 exempts optional benefits paid from a New York State
employees’ retirement system from state tax. Therefore, according to §110 of the Retirement and Social
Security Law, if a New York State employee were to receive an in-service distribution from the retirement
system, the benefit would not be subject to New York State tax.
Retirement and Social Security Law §110 only addresses the tax treatment of benefits paid from a
New York State Employees’ Retirement system, and Petitioner is a federal employee. Federal law, however,
requires similar treatment of federal retirement benefits. In Davis v. Michigan Department of the Treasury,
489 U.S. 803, (1989), the United States Supreme Court held that states that exempt pensions of their own
employees from income taxes must provide a similar exemption to employees of the federal government.
The Court relied on 4 USC §111 which states that, “[t]he United States consents to the taxation of pay and
compensation for personal service as an officer or employee of the United States … by a duly constituted

-2-

TSB-A-10(8)I
Income Tax
October 12, 2010

taxing authority having jurisdiction, if the taxation does not discriminate against the officer or employee
because of the source of the pay or compensation.” Id. at 813-814. Because distributions from the
New York State Employees’ Retirement System are exempt from State income tax, the Court’s decision in
Davis requires the same treatment of Petitioner’s in-service distributions from the Federal Employees’
Retirement System. Accordingly, the in-service distributions to Petitioner from the Federal Employees’
Thrift Savings Plan qualify for the income subtraction modification under Tax Law §612(c)(3)(ii).

DATED: October 12, 2010

NOTE:

/S/
DANIEL SMIRLOCK
Deputy Commissioner and Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set
forth therein and is binding on the Department only with respect to the person or entity to whom
it is issued and only if the person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department policies in effect as of the
date the Opinion is issued or for the specific time period at issue in the Opinion.