It is tax time again! The time of year where we get questions about LOSAP and income taxes. Keep in mind that this post is not intended to be tax advice. Firefly Admin Inc. does not provide tax advice, and all participants and beneficiaries who receive a LOSAP benefit are strongly encouraged to consult with a qualified tax professional regarding the information provided in this post. The information contained herein is accurate as of the date of the post. Guidance or publications issued by the Internal Revenue Service after the date of this post may invalidate some or all of the information provided.
The following information regarding LOSAP may be used to assist someone in preparing a tax return for an individual who received a payment from a LOSAP during the 2023 tax year. It may also be helpful to anyone who wants to understand why a LOSAP payment was reported on a particular form. It is intended primarily for New York State residents. If the payment recipient lives outside of New York State, or the LOSAP is sponsored by a municipality outside of New York State, please consult the State’s tax department for details on how LOSAP payments are taxed in your State.
- LOSAP is an acronym for Length of Service Award Plan/Program
- Section 457(e)(11) of the Internal Revenue Code (the “Code”) sets the limits on the benefits that can be provided and the qualifications of volunteers to participate in a LOSAP. A program that qualifies as a LOSAP under this section of the Code is exempt from having to comply with all the other requirements of Section 457.
- Section 3121(a)(5)(I) of the Code provides that a payment from a LOSAP is not treated as wages for purposes of Federal Insurance Contribution Act (FICA) taxes. In other words, payments from a LOSAP are not subject to FICA tax (i.e., self-employment tax).
- LOSAP payments are subject to ordinary federal income tax. In general, LOSAPs are administered so that an individual will include a LOSAP payment in his/her taxable income for the tax year in which it was paid to him/her.
- LOSAP is not a pension, annuity, retirement or profit-sharing plan, or an IRA. Therefore, based on the 2023 instructions for the 1099-R, payments from a LOSAP should not be reported on a 1099-R. However, in some instances LOSAP payments are made from insurance contracts (e.g., annuity contracts) and the correct form to report a payment from an insurance contact is a 1099-R. If you received a 1099-R or any other tax form besides a 1099-MISC reporting payments from a LOSAP, please contact the company that issued that tax form for more information.
- Payments issued from LOSAP Trust Fund assets that are not insurance contracts (which represents most Firefly Admin Inc. clients) are reported on IRS Form 1099-MISC in Box 3 (Other Income). In accordance with the 2023 Instructions for the 1099-MISC and 1099-NEC:
Generally, amounts paid to individuals that are reportable in box 1 are subject to self-employment tax. If payments to individuals are not subject to this tax, report the payments in box 3 of Form 1099-MISC.
- Payments reported in Box 3 of a 1099-MISC should likely be reported on line 8z of Schedule 1 of the Form 1040. For the description, we suggest writing the applicable section of the Code, which is 457(e)(11).
- For New York State residents, New York State Tax Law Section 612(c)(41) provides that payments from a LOSAP can be subtracted from an individual’s New York State taxable income provided that (1) the taxpayer is over age 59 ½ and (2) the benefit was not paid as a lump sum.
- For eligible New York State residents to take advantage of this favorable tax treatment, use supplemental form IT-225 and list the amount received using subtraction S-130.
- The 1099-MISC form does not include a box to indicate if the payment was made as a lump sum or on a periodic basis. Therefore, an individual taking advantage of the New York State subtraction must make his/her own determination on his/her eligibility.
Please contact Firefly Admin Inc. with questions.
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