Are IRC 414(h) Contributions Taxable in New York?

Many public sector employees participate in governmental retirement plans that involve contributions under Internal Revenue Code (IRC) Section 414(h). These contributions are often structured in a unique way, impacting how they are treated for federal tax purposes. This article clarifies the nature of IRC 414(h) contributions and, more importantly, how distributions from these specific types of plans are treated for New York State income tax purposes.

Understanding IRC 414(h) Contributions

IRC 414(h) contributions refer to amounts that employees are required to contribute to a governmental retirement plan, but which are “picked up” by their employer. This means the employer pays these contributions directly into the retirement plan on behalf of the employee. For federal income tax purposes, these “picked-up” contributions are treated as employer contributions, even though they originate from the employee’s salary.

The primary advantage of this arrangement for federal tax purposes is that the contributions are excluded from the employee’s gross income in the year they are made. The funds grow tax-deferred within the retirement account, meaning no federal income tax is paid on the earnings until distributions begin in retirement. However, when these funds are eventually distributed from the plan, they are generally subject to federal income tax.

New York State Taxability of Retirement Distributions

While IRC 414(h) contributions receive favorable federal tax treatment by being excluded from current income, New York State handles these contributions differently in the year they are made. For New York State income tax purposes, the amounts contributed under IRC 414(h) are typically added back to your federal adjusted gross income (AGI) when calculating your New York taxable income.

Despite the contributions being taxed by New York State in the year they are made, the tax treatment of the subsequent distributions from these governmental retirement plans is generally favorable. Pension income received from New York State or a local government retirement system is typically not taxable by New York State. This exemption also extends to pension income from the federal government. Therefore, distributions from governmental plans that include IRC 414(h) contributions, if originating from New York State or local government, are generally exempt from New York State income tax when received.

However, if your pension distributions are from sources other than New York State, local government, or the federal government, they may be subject to New York State income tax. In such cases, New York State offers a pension and annuity exclusion. Individuals who are 59 1/2 years of age or older can exclude up to $20,000 of qualifying pension and annuity income from their New York taxable income. If both spouses in a married couple filing jointly meet the eligibility criteria, each can claim this $20,000 exclusion, potentially excluding up to $40,000 in total.

Reporting Your New York Retirement Income

When you begin receiving distributions from a retirement plan, including those with IRC 414(h) components, you will typically receive a Form 1099-R from your plan administrator. This form reports the gross distribution amount and the taxable amount for federal income tax purposes.

For New York State income tax purposes, the “add-back” of IRC 414(h) contributions (in the year the contributions were made) is reported as an addition modification on the appropriate state tax form. Residents use Form IT-201, and nonresidents or part-year residents use Form IT-203, with the amount typically entered on Line 21. If your pension distributions are from a New York State, local government, or federal government plan and are therefore not taxable by New York, you would typically exclude these amounts on your New York State tax return, often on Line 26 of Form IT-201.

Should you receive a taxable pension from a source other than a New York State, local government, or federal plan, and you qualify for the New York State pension and annuity exclusion, you will claim this exclusion as a subtraction modification on your state tax return. This adjustment reduces your New York taxable income, reflecting the permissible exclusion amount. Understanding these reporting steps ensures accurate compliance with New York State tax regulations.