January 2002

Taxation of Nonqualified Plan Payments to Nonresidents

By Alfred T. Grillo, CPA, Consolidated Edison, Inc.

In a recently issued advisory opinion [TSB-A-01(2)I], the New York State Department of Taxation and Finance addressed the question of whether lump sum distributions from a nonqualified plan to nonresidents are exempt from state personal income tax. The department also provided guidance on withholding for such payments to both residents and nonresidents.

U.S. Code, Title 4, section 114(a), as added by Public Law 104-95, January 10, 1996, applicable to amounts received after December 31, 1995, provides that “no state may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such state (as determined by the laws of such state).” USC Title 4, section 114(b)(1), defines the term “retirement income” as any income from, among other things, any plan, program, or arrangement described in IRC section 3121(v)(2)(c), if such income is either part of a series of substantially equal periodic payments or a payment received after termination of employment under a plan, program, or arrangement (to which such employment relates) maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed on qualified plans.

Limited Service Corporation, a subsidiary of The Limited, Inc., adopted a nonqualified deferred compensation plan for certain employees of affiliates of The Limited, Inc. It asked the department whether lump sum distributions from such a plan to New York nonresidents that have terminated employment are exempt from the state’s personal income tax. The department advised that lump sum distributions will be treated as retirement income and will be exempt from state personal income tax when received by nonresidents and nondomiciliaries.

The Limited, Inc., also asked whether withholding was required if the employee was a New York resident but the employer did not maintain an office or transact business in New York. The department advised that withholding would not be required for state personal income tax or New York City withholding purposes.

The last issue was whether withholding was required for distributions from nonqualified plans if the employer has an office or transacts business in New York but the employee is a nonresident. The department ruled that withholding is not required because the distributions would not be taxable under the state personal income tax law; nor would withholding be required for New York City purposes.

State and Local Editor:

Stewart Buxbaum, CPA
S. Buxbaum & Company, P.C.

Interstate Editor:

Nicholas Nesi, CPA
BDO Seidman LLP

Contributing Editors:

Henry Goldwasser, CPA
M.R. Weiser & Co. LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

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