Are IRC 414(h) Contributions Subject to New York Tax?
Clarify New York State income tax rules for specific employer-funded pension contributions.
IRC Section 414(h) addresses contributions to governmental pension plans. These contributions are frequently “picked up” by the employer, which can lead to questions regarding their tax treatment. For many government employees, particularly those residing in New York, understanding how these contributions are handled for state income tax purposes is a common area of confusion. This article focuses specifically on the tax implications of IRC 414(h) contributions for New York State income tax residents.
Federal Treatment of IRC 414(h) Contributions
For federal income tax, IRC 414(h) provides a specific treatment for employee contributions to governmental retirement plans. When an employer “picks up” mandatory employee contributions, these amounts are treated as employer contributions. This classification means they are generally excluded from an employee’s gross income at the time they are contributed to the plan.
The effect of this “employer pick-up” is that these contributions are essentially pre-tax deductions for federal purposes, deferring taxation until the funds are distributed from the retirement plan. While these amounts are not subject to federal income tax at the time of contribution, they remain subject to Social Security and Medicare taxes, also known as FICA taxes. On an employee’s Form W-2, these contributions are typically not included in Box 1 but are often reported in Box 14, with a specific code such as “IRC 414H.” This federal treatment establishes the baseline from which state tax considerations arise.
New York State Tax Treatment of IRC 414(h) Contributions
Unlike the federal approach, New York State generally does not conform to the federal exclusion for “picked-up” contributions made under IRC 414(h). For New York State income tax purposes, these contributions are typically considered taxable income in the year they are made. This means that while they reduce federal taxable income, they are added back for state tax calculations.
This divergence stems from New York’s specific tax laws, which often require an “addition modification” for amounts that were excluded from federal adjusted gross income but are taxable at the state level. These retirement contributions, even if “picked up” by the employer, are taxed by New York State in the year they are earned, rather than when they are distributed during retirement.
Reporting and Adjustments for New York Tax
Given that IRC 414(h) contributions are taxable for New York State income tax purposes, taxpayers must make an adjustment when filing their state return. These contributions, excluded from federal taxable income, must be added back to federal adjusted gross income (AGI) to arrive at the New York State AGI. This ensures the contributions are properly subjected to state taxation.
The amount of these contributions is usually found in Box 14 of the employee’s Form W-2. Taxpayers typically report this addition modification on Line 21 of Form IT-201 or Form IT-203. When using tax preparation software, selecting the appropriate code for the Box 14 entry, such as “414HSUB” for New York, will generally ensure the amount flows correctly to the designated line for the addition modification.