Do monthly payments a retiree receives for life under a former employer's non-qualified deferred compensation plan qualify as an 'annuity' eligible for New York's $20,000 pension and annuity income subtraction?

Plain-English summary

Petitioner, Samuel Boiko, worked for Pinelawn Park (Pinelawn Cemetery) for 27 years before retiring at age 65 in December 1995. Since retirement he has received monthly checks under the Pinelawn Memorial Park Deferred Compensation Plan, a non-qualified plan (not qualified under Internal Revenue Code § 401) dated June 9, 1976. The Plan pays him 30 percent of his final average compensation - the percentage set by his 27 years of service - for the rest of his life, or for 10 years certain (120 monthly payments) if that is longer, with any remaining guaranteed payments going to a named beneficiary if he dies first. Petitioner made no contributions to the Plan and receives no other retirement benefits from Pinelawn.

Petitioner asked whether these payments qualify as an "annuity" under Tax Law § 612(c)(3-a) and 20 NYCRR § 112.3(c)(2)(i), which would let him subtract up to $20,000 per year of the payments from his federal adjusted gross income when computing his New York adjusted gross income.

The Department explained that § 612(c)(3-a) and 20 NYCRR § 112.3(c)(2)(i) allow the $20,000 subtraction only if: (a) the pension and annuity income is included in federal adjusted gross income; (b) it is received in periodic payments (other than IRA or Keogh distributions); (c) it is attributable to personal services performed before retirement, arising from an employer-employee relationship or from tax-deductible retirement plan contributions; and (d) the recipient is at least 59 1/2 years old. Because the regulation defining the subtraction does not itself define "annuity," the Department borrowed the definition from 20 NYCRR § 132.4(d)(2) (used for determining New York source income of nonresidents), which requires that the benefit be paid only in money, paid at regular intervals at least annually for life (or at least half of life expectancy), paid at a uniform rate or one that varies only in specified limited ways, have a total amount determinable at the annuity starting date, and be evidenced by a written instrument or plan.

Applying that definition, the Department concluded that Petitioner's monthly, lifetime, fixed-percentage payments under the written Plan constitute an annuity. Assuming the payments are included in Petitioner's federal adjusted gross income, they satisfy § 612(c)(3-a) because Petitioner is over 59 1/2 and the payments are attributable to his personal services performed before retirement as a non-union Pinelawn employee. Petitioner may therefore subtract up to $20,000 per year of the Plan payments in computing his New York adjusted gross income.

What this means for you

Retirees receiving payments under a non-qualified employer deferred-compensation plan

A retirement plan does not need to be a tax-qualified plan under Internal Revenue Code § 401 to produce payments that count as an "annuity" for New York's $20,000 pension and annuity subtraction. What matters is whether the payment stream itself meets the regulatory definition - paid in money, at regular intervals of at least annually, for life or a comparable minimum period, at a uniform or limited-variation rate, with a determinable total amount, under a written plan - and whether the four conditions in Tax Law § 612(c)(3-a) are met (inclusion in federal AGI, periodic payments, attributable to pre-retirement personal services, and age 59 1/2 or older).

Employers/plan administrators structuring retirement payment schedules

Plans that pay a fixed percentage of final compensation monthly for life (or a guaranteed minimum period such as 10 years certain, with a named-beneficiary continuation feature) fit the regulatory annuity definition even though they are non-qualified and involve no employee contributions. Documenting the plan in a definite written program communicated to employees, and setting a payment structure with a uniform rate and a determinable total, supports employees' ability to claim the subtraction on payments they later receive.

Common questions

Q: Does a deferred compensation plan have to be "qualified" under the Internal Revenue Code to produce an annuity for New York tax purposes?
A: No. Petitioner's Plan was expressly a non-qualified plan within the meaning of Internal Revenue Code § 401, yet the Department still found the payments constituted an annuity because the payment stream itself met the regulatory definition in 20 NYCRR § 132.4(d)(2).

Q: What four conditions must be met for pension and annuity income to qualify for the $20,000 subtraction under Tax Law § 612(c)(3-a)?
A: (1) the income must be included in federal adjusted gross income; (2) it must be received in periodic payments (other than IRA or Keogh distributions); (3) it must be attributable to personal services performed by the individual before retirement, arising from an employer-employee relationship or tax-deductible retirement plan contributions; and (4) the individual must be at least 59 1/2 years of age.

Q: Since 20 NYCRR § 112.3(c)(2)(i) doesn't define "annuity," where does the definition come from?
A: The Department applied the definition in 20 NYCRR § 132.4(d)(2), which is otherwise used to determine New York source income of nonresident individuals, because no definition exists specifically for the pension and annuity subtraction.

Q: What made Petitioner's monthly payments qualify as an "annuity" under that definition?
A: The payments were paid only in money; paid monthly (at least annually) for Petitioner's life or 10 years certain, whichever is longer; paid at a uniform rate (30 percent of final average compensation); had a determinable total amount; and were evidenced by the written Plan document maintained by Pinelawn.

Q: Does making no contributions to the plan affect whether payments qualify as an annuity or for the subtraction?
A: No. Petitioner was not required to make any contributions to the Plan during his employment, and this did not prevent the payments from qualifying as an annuity or from meeting the personal-services condition of § 612(c)(3-a), since the payments arose from his employer-employee relationship.

Q: Is the $20,000 subtraction guaranteed regardless of how the payments are reported federally?
A: No. The opinion's conclusion is conditioned on the payments actually being included in Petitioner's federal adjusted gross income; the subtraction applies only to income that first appears in federal AGI.

Citations and references

• Tax Law § 612(a) - defines a resident individual's New York adjusted gross income as federal adjusted gross income with specified modifications
• Tax Law § 612(c)(3-a) - allows a subtraction of up to $20,000 of pension and annuity income (other than pensions paid to NY/local/federal public officers and employees) for taxpayers meeting specified conditions
• 20 NYCRR § 112.3(c)(2)(i) - sets out the conditions for the pension and annuity income subtraction (inclusion in federal AGI, periodic payments, attributable to pre-retirement personal services, and age 59 1/2 or older)
• 20 NYCRR § 132.4(d)(2) - defines "annuity" (paid in money only; paid at regular intervals at least annually for life or a comparable minimum period; paid at a uniform or limited-variation rate; total amount determinable at the annuity starting date; evidenced by a written instrument or plan), borrowed here because no annuity definition appears in § 112.3(c)(2)(i)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a99_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(1)I
Income Tax
June 25, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I990326A

On March 26, 1999, a Petition for Advisory Opinion was received from Samuel Boiko, 46
Harrison Place, Massapequa, New York 11758.
The issue raised by Petitioner, Samuel Boiko, is whether the payments received pursuant to
his employer's deferred compensation plan, constitute an annuity within the meaning of section
612(c)(3-a) of the Tax Law and section 112.3(c)(2)(i) of the Personal Income Tax Regulations
("Regulations").
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner was an employee of Pinelawn Park for 27 years prior to his retirement at age 65
in December, 1995. Since retirement, Petitioner has received monthly retirement checks under the
Pinelawn Memorial Park Deferred Compensation Plan, dated June 9, 1976 (the "Plan") maintained
by his employer. The Plan is a non-qualified plan within the meaning of section 401 of the Internal
Revenue Code.
The Plan provides that Pinelawn Cemetery ("Pinelawn"), has adopted a deferred
compensation plan for its non-union employees, and in order to assist in making funds available in
the future as may be needed, Pinelawn is purchasing life insurance contracts with annuity features
covering those of its non-union employees who are physically qualified therefor and annuity plans
for those who are not physically qualified for life insurance. The Plan provides for retirement
annuity benefits as follows:
(a) Annuity benefits are not payable if benefits are paid under the death benefits
provision or the disability benefits provision of the Plan.
(b) Annuity benefits are calculated by a percentage of final average compensation,
where the percentage is determined by the number of full fiscal years of service. For
27 years of service, the Plan provides that the annuity benefit is 30 percent of the
employee's final average compensation.
(c) The Plan provides that the "final average compensation" for all non-union
employees not on commission, is their last, full, calendar year's salary, and for all
those non-union employees working on a commission basis, the final average
compensation shall be determined as an average of the best, three, consecutive
calendar years of the last, full, twelve calendar years of service.

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(d) Annuity benefits are payable monthly following the non-union employee's
retirement on or after the normal retirement date – attainment of either age 65 or 10
fiscal years of full-time service, whichever comes second – the payments
commencing on or about the 20th of the month following the month of retirement.
(e) Annuity benefits are to be paid for life or for 10 years certain, whichever comes
second – in the event that following retirement and prior to completion of 120
monthly payments (10 years) the employee should die, then the remainder of the 120
payments are payable only to the beneficiary so named and filed in writing with
Pinelawn.
Under the Plan, Petitioner will receive retirement annuity payments over his lifetime. If
Petitioner dies prior to receiving 120 monthly payments, his beneficiary is entitled to any remaining
payments necessary to guarantee payments for a minimum of 120 months, as provided under the
Plan. Petitioner was not required to make contributions to the Plan during his period of employment.
Petitioner receives no other retirement benefits from his former employer other than the benefits paid
under the Plan.
Discussion
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-a) of the Tax Law contains a 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.
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 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
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,

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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.
The term "annuity" is not defined in section 112.3(c)(2)(i) of the Regulations, but is defined,
for purposes of determining New York source income of a nonresident individual, in section
132.4(d) of the Regulations as follows:
(2) Definition. To qualify as an annuity, a pension or other retirement benefit
must meet the following requirements:
(i) It must be paid in money only, not in securities of the employer or other
property.
(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 of such individual's life
expectancy as of the date payments begin.
(iii) It must be payable:
(a) at a rate which remains uniform during such life or period; or
(b) at a rate which varies only with:
(1)the fluctuation in the market value of the assets from which such benefits
are payable;
(2) the fluctuation in a specified and generally recognized cost-of-living
index; or
(3) the commencement of social security benefits; or
(c) in such a manner that the total of the amounts payable is determinable at
the annuity starting date either directly from the terms of the contract or indirectly by
the use of either mortality tables or compound interest computations, or both, in
conjunction with such terms and in accordance with sound actuarial theory. The term
annuity starting date in the case of any contract or plan is the first day of the first

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period for which an amount is received as an annuity by the individual under the
contract or plan.
(iv) The individual's right to receive it must be evidenced by a written
instrument executed by his employer, or by a plan established and maintained by the
employer in the form of a definite written program communicated to his employees.
In this case, pursuant to the written Plan of his employer, Petitioner is receiving monthly
payments, equal to 30 percent of his final average compensation, for the rest of his life. This
retirement benefit constitutes an annuity pursuant to section 132.4(d)(2) of the Regulations.
Assuming that this annuity income that Petitioner receives from the Plan is included in
Petitioner's federal adjusted gross income, this annuity income meets the conditions set forth in
section 612(c)(3-a) of the Tax Law and section 112.3(c)(2)(i) of the Regulations because Petitioner
is more than 59 ½ years of age, and the annuity, received in monthly payments, is attributable to
personal services performed by Petitioner prior to his retirement as a non-union employee of
Pinelawn.
Accordingly, when computing New York adjusted gross income, Petitioner may, pursuant
to section 612(c)(3-a) of the Tax Law, subtract from federal adjusted gross income up to $20,000
of the payments Petitioner receives each year from the Plan.

DATED: June 25, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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