April 2003
Distributions from Section 457 Plans Eligible for New York Pension Exclusion
By Mark H. Levin, CPA, H.J. Behrman & Company, LLP
The Economic Growth and Tax Relief Reconciliation Act of 2001 changed the treatment of distributions made from government section 457 plans through the addition of IRC section 3401(a)(12)(E). Effective for taxable years beginning on or after January 1, 2002, distributions made from government section 457 plans will be characterized for federal purposes as pension or annuity payments. Distributions from government section 457 plans had previously been characterized as wages.
This change in the characterization of distributions from government section 457 plans from wages to pension or annuity income permits the exclusion of all or a portion of a distribution from a government section 457 plan from New York taxation. Under N.Y. Tax Law section 612(c)(3-a), an individual who is over the age of 59 As may exclude up to $20,000 of eligible pension and annuity included in federal adjusted gross income from the computation of total New York income. Distributions from government section 457 plans now qualify for this exclusion.
These amendments also permit taxpayers to take advantage of rollover provisions in the IRC. Taxpayers may now roll over distributions from government section 457 plans to IRAs and other qualified plans, and from individual retirement accounts and other qualified plans to government section 457 plans.
The net effect of these changes is a savings to affected New York state taxpayers. Such taxpayers include New York State, New York City, and Yonkers full-year resident individuals, estates, and trusts; New York State, New York City, and Yonkers part-year resident individuals, estates, and trusts; and New York State and Yonkers nonresidents.
The New York State Department of Taxation and Finance has issued guidance on the treatment of distributions from government section 457 plans in TSB-M-02(9)I, which can be downloaded at www.tax.state.ny.us/PDF/memos/Income/M02_9i.pdf.
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