Current Pension Topics
No HHC Surrender Charges

By JOEL L. FRANK

I have received a lot of questions concerning "Surrender Charges" from participants in the Health and Hospitals Corporation 403(b) Program [HHC 403(b) Program] administered by Prudential Financial. I am pleased to inform all of you that there are no Surrender Charges. So when you transfer/roll over your account balance to another custodian, Prudential Financial will not charge you for doing so.

Review: If younger than 59-1/2 and still working, use Revenue Ruling 90-24 to transfer your HHC 403(b) balance to a 403(b) investment with the Vanguard Group. If older than 59-1/2 or retired, roll over your HHC 403(b) balance to the IRA Program of the Deferred Compensation Plan of the City of New York. While still working and regardless of age, invest your current contributions in the Deferred Compensation 457(b)/401(k) Plan of the City of New York.

Q.: Your Current Pension Topics column of Jan. 12 and 19 brought to mind the following question: Why doesn't the "pension and annuity income exclusion" apply to distributions from the Teachers Retirement System's 403(b) Program (TRS 403(b) Program), when it applies to all the other 403(b) plans that New York resident taxpayers may be participants of? In other words, regardless of the amount of the withdrawal from the TRS 403(b) Program, the entire distribution is free of State, New York City and Yonkers income tax. This makes the TRS 403(b) Program a Qualified Pension Plan, which most certainly it is not. What in the devil is going on?

S.M.

A.: I wish I knew. Again, participants in the TRS 403(b) Program are being singled out for preferential tax treatment that is contrary to New York State tax law. For 36 years, contributors to this supplemental retirement savings program have unfairly benefited by receiving all distributions from the program totally exempt from the New York State and Cities of New York and Yonkers income tax. For 36 years, TRS 403(b) Program distributions have been received, in clear contradiction to the law, 100 percent tax-free, not tax-deferred as clearly intended by the law.

Because the TRS 403(b) Program is voluntary and supplemental to the Teachers' Retirement System's Qualified Pension Plan (TRS QPP), distributions from it should be subject to the "pension and annuity income exclusion" just like the distributions from all other voluntary supplemental plans are [403(b), 457(b), 401(k), IRA]. According to state law, just the first $20,000 of annual distributions from such plans is excluded from the income tax. Amounts in excess of the $20,000 are fully taxable. See page 86 of the 2006 edition of: "Resident Income Tax Forms and Instructions."

Note: The $20,000 exclusion applies only to those distributions the taxpayer receives after attaining age 59-1/2 while the entire distribution from the TRS 403(b) program is tax-free regardless of age because it is, contrary to law, treated as a QPP.

By law K-12 educational employees outside of the city belong to the QPP of the New York State Teachers Retirement System, which does not offer its members a 403(b) Program as the city's TRS does. Public school districts, other than the city are, therefore, forced to use private financial services firms (mutual funds and insurance companies) for their 403(b) programs. This holds true for the tens of thousands of non-educational public employees in the city and state who contribute to 457(b) and 401(k) plans. These plans are not QPP and that's why distributions from them are properly subject to the $20,000 pension and annuity income exclusion.

In the two previous columns I showed how linking the TRS 403(b) Program to the TRS QPP "conveniently" leads to an improper constitutional taxpayer guarantee of an 8.25-percent interest rate option through June 30, 2009. In a like fashion, linkage of the TRS 403(b) Program to the TRS QPP has made all TRS 403(b) distributions, regardless of age, improperly exempt from state and city income tax. What neat tricks. Did New York lawmakers intend to make the TRS 403(b) Program a QPP with its benefits tax-free or a voluntary pre-tax savings plan with its benefits tax deferred? We all know the answer. The Department of Taxation and Finance should start enforcing the law. As S.M. says: "What in the devil is going on?"

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .