Opinion Issued About NQDC Lump Sum and State Tax

In this case, the petitioner of the opinion worked as an executive vice president for Dime Savings Bank, a corporation headquartered in New York, New York. In January 2002, after Dime was acquired by Washington Mutual Bank, the petitioner accepted retirement. Between 2002 and 2003, the petitioner began to receive payments under two retirement plans–a non-qualified deferred compensation (NQDC) plan and a nonqualified SERP (supplemental employee retirement plan).

In 2008, Washington Mutual Bank filed for bankruptcy and its assets were sold to JPMorgan Chase, who took over certain obligations regarding the SERP and DC plan in question. In May 2012, JPMorgan Chase distributed a lump-sum payment to the petitioner that withheld an amount equal to the New York state and local estimated income tax. However, the petitioner was never a resident of New York State.

The opinion referenced Section 114 of Title 4 of the U.S. Code which says a state may not tax retirement income for an individual that does not reside in that state and payments from a NQDC plan are considered retirement income not subject to tax if they are made in periodic installments. The Department ruled the state may not impose personal income tax on the retirement income of the petitioner since he was not a resident, and that the lump sum was still retirement income because the bankruptcy was the cause of the lump-sum settlement. The opinion stated “the fact that the Washington Mutual Bank bankruptcy proceeding caused the petitioner to accept a lump-sum payment…does not change the tax characterization of the payment.”

A copy of the opinion can be found here.