New York Advisory Opinion TSB-A-86 (11)I: Do payments made to a former officer under a paid leave-of-absence agreement with his employer qualify as 'pensions and annuities' eligible for the $20,000 section 612(c)(3-a) exclusion, and does the employer's use of Form W-2 (rather than W-2P) matter?

Plain-English summary

Nat Gilbert had been an officer and director of Matsushita Electric Corporation of America (MECA) and Panafax Corporation until October 31, 1984, when - about a month after turning 59½ - he signed an agreement with MECA under which he resigned his officer/director titles but remained a MECA employee on a paid leave of absence through February 28, 1987 (roughly 2.25 more years). During that period he wasn't required to perform services and was free to seek other employment, but he received $17,000 a month plus a $100,000 lump sum at the end, along with continued fringe benefits. Gilbert indicated the arrangement was designed to settle a potential age-discrimination claim. He asked whether these payments qualified as tax-favored "pensions and annuities" under Tax Law § 612(c)(3-a) (which excludes up to $20,000 for a person 59½ or older), and whether it mattered that MECA reported the payments on Form W-2 (wages) rather than Form W-2P (pension/annuity income).

The Department found the payments failed on multiple independent grounds. Substantively, the agreement itself treated Gilbert as continuing to be an employee, not a retiree, and characterized the payments as if they were wages - nothing in the agreement suggested either party intended the payments to be pension or annuity payments, and if (as Gilbert stated) the payments were consideration for waiving a discrimination claim, that itself is not a pension or annuity paid on account of pre-retirement services. Separately, the payments failed the regulatory test for an "annuity" under personal income tax regulation § 131.4(d)(2), which requires payments at regular intervals for at least half the recipient's remaining life expectancy: using the federal life-expectancy tables (26 CFR § 1.72-9), a 59-year-old could expect to live 18.9 more years, meaning payments would need to run at least 9.45 years to qualify - but Gilbert's payments ran only about 2.25 years, far short of that threshold.

On the W-2 question, the Department gave a nuanced answer: the employer's choice of reporting form is "not, by itself, controlling," but it is meaningful evidence of the parties' intent. MECA's use of Form W-2 (rather than W-2P, used for annuity/pension/retired-pay recipients) reinforced the Department's conclusion that both MECA and Gilbert understood the payments as wages, not retirement income.

What this means for you

Executives negotiating a paid leave-of-absence or settlement arrangement near age 59½

Don't assume that payments received after age 59½, even ones tied to winding down your employment, automatically qualify for the $20,000 pension/annuity exclusion. This opinion shows the Department looks at both the SUBSTANCE of the arrangement (is it genuinely a retirement pension, or effectively continued wages/settlement consideration?) and the DURATION of payments relative to your life expectancy - a short, fixed-term arrangement like a 2-3 year leave-of-absence payout will not qualify as an annuity even if you're past the age threshold.

Employees receiving payments tied to a discrimination-claim settlement

If your severance or leave-of-absence payments are, in substance, compensation for waiving a legal claim (like age discrimination) rather than a retirement benefit for past service, expect the Department to treat them as ordinary wages rather than pension/annuity income - regardless of your age at the time.

Employers and HR/benefits staff structuring exit or transition agreements

Be aware that your choice of tax reporting form (W-2 vs. W-2P) is not decisive on its own, but the Department will treat it as evidence of how you and the employee understood the payments. If you intend a payment to be treated as a pension/annuity, both the substance of the agreement and the reporting form should be consistent with that characterization.

Common questions

Q: I'm over 59½ and receiving payments under a leave-of-absence or transition agreement with my former employer - do they qualify for the $20,000 pension exclusion?
A: Not necessarily. This opinion denied the exclusion because the agreement treated Gilbert as a continuing employee receiving wage-like payments (not retirement benefits) and because the payment period was far shorter than the regulatory minimum (at least half your remaining life expectancy) required to qualify as an annuity.

Q: Does it matter whether my employer reports these payments on Form W-2 or Form W-2P?
A: The form isn't controlling by itself, but the Department treats it as evidence of intent. Reporting on Form W-2 (ordinary wages) rather than Form W-2P (annuity/pension/retired pay) supports treating the payments as wages, not pension/annuity income.

Q: How is the minimum required duration for an "annuity" calculated?
A: Personal income tax regulation § 131.4(d)(2) requires payments at regular intervals for at least half the recipient's remaining life expectancy, calculated using the federal life-expectancy tables (26 CFR § 1.72-9). Payments over a shorter period do not qualify as an annuity, regardless of their size or regularity.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a86_11i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (11) I
Income Tax
August 29, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I860701B

On July 1, 1986, a Petition for Advisory Opinion was received from Nat Gilbert, 240 Hamlet
Drive, Jericho, New York 11753.
The issues raised are: (1) whether payments made under an agreement signed by Petitioner
qualify as "pensions and annuities," within the meaning of section 612(c)(3-a) of the Tax Law and
(2) whether the filing of form W-2 by Petitioner's employer has any bearing on the determination of
the nature of the payments made to Petitioner.
Petitioner was an active officer and director of Matsushita Electric Corporation of America
(MECA) and Panafax Corporation (Panafax) until October 31, 1984 when he executed an agreement
with MECA for what appears to be a paid leave of absence. Petitioner attained the age of fifty-nine
and one half years in December of 1984. Petitioner submitted information describing the agreement
in pertinent part as follows:
The agreement provides that Petitioner is to resign as an officer/director but is to continue
as an employee of MECA on leave of absence. Petitioner's employment with MECA is to terminate
on February 28, 1987. While Petitioner will not be required to render specific services during this
time and is free to seek employment elsewhere, he will nonetheless be compensated $17,000 per
month with an additional lump sum payment of $100,000 on March 1, 1987. Petitioner will also
receive fringe benefits in the form of MECA life insurance, profit sharing, major medical and dental
coverage, long term disability coverage and travel accident insurance for trips made on MECA
business.
Petitioner also indicates that the payments are being made by his employer to avoid a possible
age discrimination action.
ISSUE I
Section 612(c)(3-a) of the Tax Law provides, in pertinent part, for an exclusion from personal
income taxation under Article 22 of the Tax Law of up to $20,000 of:
...pensions and annuities received by an individual who has attained
the age of fifty-nine and one half ... 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 ....

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-86 (11) I
Income Tax
August 29, 1986

This section requires both that the payments made be in the nature of a pension or annuity and that
they be attributable to services performed prior to retirement.
Nothing contained in the agreement indicates that either Petitioner or his employer intended
the payments in question to be pension or annuity payments. Instead, the agreement states that
Petitioner is to remain an employee of MECA until February 28, 1987. The agreement treats the
payments as if they are wages and not pensions or annuities. Petitioner's employer has treated the
payments as wages by reporting them on a W-2 form rather than a W-2P form. If, as Petitioner has
stated, the payments are being made in consideration of Petitioner's waiver of any claim for
discrimination, then the nature of the payments is not that of a pension or annuity and such payments
are not attributable to services performed before retirement.
Additionally, the payments made to Petitioner do not qualify as an annuity for purposes of
Article 22 of the Tax Law. Section 131.4(d)(2) of the personal income tax regulations of the New
York State Tax Commission which defines this term, although in another context, provides in
pertinent part:
(2) Definition. To qualify as an annuity, a pension or other retirement
benefit must meet the following requirements:
(i) . . .
(ii) It must be payable at regular intervals, at least annually for the life
of the individual receiving it, or over a period not less than half his
life expectancy as of the date payments begin ....
The payments in question do not fulfill requirement (ii) above. The Petitioner began his leave
of absence on October 31, 1984 when he was 59 years old. The payments made to him will continue
through February 28, 1987. An individual's life expectancy are to be calculated by use of the table
provided in section 1.72-9 of the Federal Income Tax Regulations. According to this table, Petitioner
can expect to live 18.9 years beyond his present 59 years. In order for payments made to the
Petitioner to qualify as an annuity, they must be paid over a period not less than one half the
receiver's life expectancy, which in this case is 9.45 years. Since the payments are made for a period
less than one half petitioner's life expectancy - two years and 3 months or 2.25 years - they do not
qualify as an annuity.
Accordingly, the payments made to Petitioner under the agreement between MECA and
Petitioner during the period beginning October 31, 1984 and ending February 28, 1987 do not
constitute pensions or annuities within the meaning of section 612(c)(3-a) of the Tax Law.

-3­
TSB-A-86 (11) I
Income Tax
August 29, 1986

ISSUE II
The payments made to petitioner have been reported by MECA for income tax purposes on
Form W-2. This is a wage and tax statement, while form W-2P is a statement for recipients of
annuities, pensions or retired pay. Petitioner questions whether the nature of the payments made to
him should be determined by the form used to report them.
While the employer's choice of reporting forms is not, by itself, controlling, it is an indication
of the intention of the parties involved. The filing by MECA of form W-2 rather than W-2P appears
to indicate the belief by MECA that the payments made to Petitioner were in the nature of wages,
and were not pension or annuity payments.

DATED: August 29, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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