When do employer contributions to a nonqualified deferred compensation plan count toward my company's MCTMT payroll expense -- when they vest, or when they're actually paid out to the employee?

Plain-English summary

A Florida-based software company with nine employees working within the MCTD asked whether employer contributions to a nonqualified deferred compensation plan count toward its MCTMT payroll expense at the time the contributions vest, or later when they're actually distributed to the employee.

MCTMT payroll expense is defined by reference to "wages and compensation" under IRC §§ 3121 and 3231 (Tax Law § 800(c)) — federal provisions that determine not just what counts as wages, but sometimes when. Under IRC § 3121(v)(2)(A), employer contributions to a nonqualified deferred compensation plan are treated as FICA wages on the later of (a) when the services generating the contribution were performed, or (b) when there's no longer a substantial risk of forfeiture — which, as the Department noted, "normally" means the vesting date.

Following that federal timing rule, the Department concluded that deferred compensation contributions for covered MCTD employees become part of the employer's taxable MCTMT payroll expense at vesting, and the actual distribution date is irrelevant. The opinion also flags a related wrinkle: unlike social security tax (IRC § 3121(a)(1)) and railroad retirement tax (IRC § 3231(e)(2)(A)(i)), which cap the amount of wages subject to tax each year, those annual caps do not apply when computing MCTMT payroll expense — so the full vested amount is included, uncapped.

What this means for you

Employers offering nonqualified deferred compensation plans

Build your MCTMT payroll expense calculation around vesting dates, not payout dates. A large deferred-comp grant that vests in one quarter is fully counted in that quarter's payroll expense for MCTMT purposes even if the employee won't actually receive the money for years.

Payroll and tax compliance teams

Remember the annual wage-cap exception: MCTMT payroll expense isn't limited by the social security or railroad retirement tax wage bases the way FICA/RRTA taxes are — track the full vested compensation amount separately if your payroll system defaults to capped wage figures.

Common questions

Q: If deferred compensation is distributed years after it vests, does distribution trigger MCTMT again?
A: No. The distribution date is irrelevant for MCTMT purposes — the tax attaches once, at vesting (or when earned, if later).

Q: Does the annual social security wage cap limit how much deferred comp counts toward MCTMT payroll expense?
A: No. The IRC § 3121(a)(1) and § 3231(e)(2)(A)(i) annual caps that limit social security and railroad retirement taxation specifically do not apply when computing MCTMT payroll expense.

Q: Does this timing rule apply to all forms of compensation, or just nonqualified deferred compensation?
A: This ruling addresses nonqualified deferred compensation specifically, following the special federal FICA timing rule in IRC § 3121(v)(2)(A) for that category of compensation.

Q: Can I rely on this ruling for my own company's deferred compensation plan?
A: No. This advisory opinion binds the Department only as to the petitioner and the specific facts described.

Citations and references

Statutes:

• Tax Law § 800(c) (MCTMT payroll expense defined by reference to IRC §§ 3121, 3231 wages/compensation)
• Tax Law § 800(d) ("covered employee" definition)
• Tax Law § 801 (MCTMT imposition)
• IRC § 3121(v)(2)(A) (nonqualified deferred compensation treated as FICA wages at the later of performance or vesting)
• IRC § 3121(a)(1) (social security tax annual wage cap -- inapplicable to MCTMT payroll expense)
• IRC § 3231(e)(2)(A)(i) (railroad retirement tax annual compensation cap -- inapplicable to MCTMT payroll expense)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mctmt_ao.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mctmt/a14_2mctmt.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-14(2)MCTMT
Metropolitan Commuter
Transportation Mobility Tax
July 2, 2014

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M121109A

The Department of Taxation and Finance received a Petition for Advisory Opinion
from REDACTION REDACTION REDACTION REDACTION REDACTION. Petitioner
asks whether nonqualified deferred compensation earnings are considered taxable for
purposes of the Metropolitan Commuter Transportation Mobility Tax (MCTMT) at the time
the earnings become vested to the employee or at the time the earnings are distributed to the
employee.
We conclude that, for purposes of the MCTMT, nonqualified deferred compensation
earnings are earned at the time the earnings become vested to the employee.
Facts
Petitioner is a software company based in Florida that currently has nine employees
employed within the Metropolitan Commuter Transportation District (MCTD).
Analysis
Tax Law § 801 imposes a tax on every employer who engages in business within the
MCTD that has payroll expenses in excess of $312,500 in any calendar quarter. For purposes
of determining an employer’s MCTMT liability, payroll expense consists of the “wages and
compensation,” as defined in §§ 3121 and 3231 of the Internal Revenue Code (IRC), the
employer pays to its employees who are employed within the MCTD.1 Tax Law § 800 (c),
(d). These IRC provisions determine not only what is considered wages for payroll expenses
subject to the MCTMT, but also, in some instances, when the payroll expense is subject to the
tax. Under IRC § 3121 (v)(2)(a), employer contributions to nonqualified deferred
compensation plans are considered earned “when the services are performed,” or “when there
is no substantial risk of forfeiture of the rights to such amount,” whichever is later. Therefore,
following the federal treatment, contributions to nonqualified deferred compensation plans for
covered employees in the MCTD are considered taxable payroll expenses for purposes of
determining an employer’s MCTMT liability at the time the later of the two federal tax
1

In computing payroll expense, the annual caps in IRC § 3121(a)(1) and IRC § 3231(e)(2)(A)(i) on the amount
of wages and compensation of covered employees subject to social security tax and the railroad retirement tax,
respectively, do not apply.

-2-

TSB-A-14(2)MCTMT
Metropolitan Commuter
Transportation Mobility Tax
July 2, 2014

criteria is satisfied, which normally will be when the contributions vest. The active date of
distribution is irrelevant for purposes of determining MCTMT liability.

DATED: July 2, 2014

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in
this document does not cover every situation and is not intended to replace the law
or change its meaning.