Terminal Leave Lump Sum Tax Deferral Failures
Some FD retirees receive their terminal leave lump sum check without any of the funds being tax deferred even though they requested a certain tax deferral percentage before they retired. Why does this happen? The terminal leave check is eligible for tax deferral if the NYCDCP receives the funds by the later of 2 ½ months after separation from FD or by the end of the year you separated from FD. If the FD retiree receives the terminal leave lump sum after that time, none of the wages are eligible for tax deferral.
Example #1
An FD member is retiring on May 31st, 2023, and has elected 75% tax deferral for their terminal leave lump sum payment. The member is entitled to a $25,000 terminal leave lump sum payment, is 48 years old, and has contributed $4,000 so far for the year to the NYCDCP 457 plan prior to retirement. If the member receives the terminal leave lump sum payment any time prior to the end of the year 2023, the following should be the result:
TL lump sum payment = $25,000
Less Social Security tax* = $1,550
Less Medicare tax = $363
TL lump sum payment remaining = $23,087
75% tax deferral to NYCDCP = $17,315
TL lump sum payment subject to income taxes = $5,772
*Member will not exceed the Social Security taxable minimum of $160,200 (tax year 2023)
Example #2
An FD member is retiring on September 30th, 2023, and has elected 75% tax deferral for their terminal leave lump sum payment. The member is entitled to a $25,000 terminal leave lump sum payment, is 48 years old, and has contributed $10,000 so far for the year to the NYCDCP 457 plan prior to retirement. If the member receives the terminal leave lump sum payment any time after January 1st, 2024; the following should be the result:
TL lump sum payment = $25,000
Less Social Security tax = $1,550
Less Medicare tax = $363
TL lump sum payment remaining = $23,087
75% tax deferral to NYCDCP = $0
TL lump sum payment subject to income taxes = $23,087
In this example (#2) why weren’t any of the terminal leave funds tax deferred into the NYCDCP? Simply because the check took too long to get there. The check arrived in a new calendar year and beyond 2 ½ months from separation.
For FD members who retire during the later part of a year you may want to assume that none of the terminal leave lump sum payment will be eligible for tax deferral. In this case, FD members should consider lowering their ongoing NYCDCP deferral percentage to zero prior to retirement. By having your deferral percentage at zero it will provide you with the ability to take withdrawals/rollovers from your NYCDCP 457 plan a lot sooner.