NYS Audit Notices: What FDNY Retirees Need to Know

New York State Audit Activity

Over the past several weeks, there has been a noticeable increase in New York State audit notices issued to retirees regarding distributions from the Empower–Uniformed Fire Officers Association (UFOA) Annuity Plan. This development has understandably caused confusion and concern among retirees. While multiple factors may be contributing to this activity, two primary developments appear to explain the current increase in audit notices.

1. UFOA 2022 Announcement Regarding Rollovers and Tax Treatment

In early 2022, the UFOA announced that retirees could roll over funds from the NYC Deferred Compensation 457 Plan into the UFOA Annuity Plan. It was further represented that distributions from the UFOA Annuity Plan would be “treated as a pension” for New York State income tax purposes, and that this treatment resulted from a newly identified “loophole.”

To understand why this position has likely attracted regulatory attention, consider the following example:

Assume a retiree rolls over $750,000 from the NYC Deferred Compensation 457 Plan into the UFOA Annuity Plan. Contributions to the 457 Plan were not previously subject to New York State or New York City income tax because they were made on a tax-deferred basis.

If the act of rolling those funds into the UFOA Annuity Plan were sufficient to convert them into entirely New York State–exempt pension income, the retiree could then withdraw the full $750,000 without incurring any New York State income tax. Under that interpretation, a retiree could effectively roll over their entire NYC Deferred Compensation account into the UFOA Annuity Plan and immediately take a large distribution with no New York State tax consequence.

Such an outcome would represent a significant departure from long-standing New York tax policy governing retirement income. New York’s tax treatment of FDNY and NYPD retirement benefits has historically been well defined, with material changes typically occurring through legislation or formal administrative guidance rather than informal interpretation.

When statements characterize a tax position as a newly discovered “loophole,” they often draw scrutiny from taxing authorities responsible for administering and enforcing the tax law. This context helps explain why NYS Department of Taxation & Finance (NYSDTF) may have taken a closer look at distributions associated with the Empower-UFOA Annuity Plan.

2. Evolving NYSDTF Review of Retirement Distributions

A second, and equally significant, development has been NYSDTF’s expanded use of electronic data analysis in reviewing retirement distributions reported on Forms 1099-R.

NYSDTF appears to have increased its ability to electronically compare information reported on Forms 1099-R with New York personal income tax returns. This expanded review allows the Department to more readily identify certain distribution characteristics, plan classifications, and reporting inconsistencies that were previously more difficult to detect through predominantly manual processes.

Historically, audit selection in this area was more limited and less precise. The recent increase in audit activity involving Empower-UFOA annuity plan distributions is consistent with a broader shift toward more data-driven review methods.

Responding to a New York State Pension Modification Audit

The audit notices currently being issued to UFOA retirees are generally classified as Pension Modification Audits. These audits focus on whether retirement distributions were properly excluded from New York taxable income under New York Tax Law § 612(c)(3).

Empower-UFOA Pension Modification Audits can be particularly complex because the UFOA Annuity Plan may contain multiple contribution sources or subaccounts, including:

• Employer-source accounts

• Employee rollover-source accounts (e.g., pre-tax officer excess, VSF DROP, etc.)

• Employee rollover-source accounts (NYC Deferred Compensation Plan, IRAs, etc.)

Each source may carry different New York State tax treatment. As a result, responding to these audits often requires careful source tracing, basis reconstruction, and year-specific analysis.

In general, the greater the number of contribution sources within a retiree’s Empower-UFOA Annuity Plan, the more complex and time-consuming the audit response becomes. An effective response typically involves providing a focused, documentation-driven submission limited to the tax year under review and the specific issues identified in the audit notice. Only records necessary to substantiate the tax treatment of the distribution for the year under review should be provided, consistent with the scope of the audit.

Brave Eagle Wealth Management and NYS Pension Modification Audits

Brave Eagle Wealth Management structures retirement accounts so that pension-eligible funds (such as excess contributions, VSF DROP, and similar pension sources) are maintained in a separate IRA that contains only pension-related money. No non-pension retirement assets are commingled in this “pension IRA.”

This structure allows for clearer source isolation and can provide greater flexibility and efficiency when taking distributions, as compared to distributions taken directly from the Empower-UFOA Annuity Plan. In addition, New York State non-taxable basis is tracked and maintained for each client until fully exhausted.

Brave Eagle Wealth Management also has extensive experience assisting clients with New York State Pension Modification Audits. In many cases, clients can grant Peter Thomann, EA, CFP® a Power of Attorney (POA), allowing him to communicate directly with NYSDTF auditors and manage the audit process on the client’s behalf. Once a POA is in place and the necessary documentation is obtained, Mr. Thomann handles the audit from start to finish.

Conclusion

The recent increase in New York State audit activity involving Empower-UFOA Annuity Plan distributions appears to be driven by a combination of claims regarding favorable tax treatment and NYSDTF’s expanded ability to electronically analyze 1099-R data. These audits are highly technical, documentation-driven, and often complicated by multiple contribution sources within a single plan.

Retirees facing a Pension Modification Audit should understand that outcomes depend heavily on accurate source identification, proper basis tracking, and a focused response tailored to the specific tax year under review. Proactive planning, clear asset segregation, and experienced representation can materially improve both the efficiency and effectiveness of the audit response process.

Disclaimer

This material is provided for general informational purposes only and is not intended as legal, tax, or investment advice. New York State tax treatment of retirement distributions depends on individual facts, contribution sources, and applicable law, which may change.

Nothing herein should be construed as a guarantee of tax treatment or audit outcome. Clients should consult their own qualified tax advisors regarding their specific circumstances.