In a post from May 20, 2019, we discussed why a LOSAP benefit cannot be rolled over to a qualified plan. You can read that article HERE.

Additionally, since a LOSAP benefit is not earned income (for Firefly clients, the income is reported on a 1099-MISC in Box 3), it cannot be deposited into an IRA. 

So what alternatives exist? If you are receiving a LOSAP benefit and are still working and receiving W-2 income, or you are married and your spouse is still working and receiving W-2 income, here are some options:

• If  your employer offers a 401(k) (or similar deferred compensation plan if you work for a government, non-profit, or school), you can temporarily increase your contributions to the retirement plan to offset the LOSAP distribution. For example, if you receive a $10,000 LOSAP distribution, simply defer an extra $10,000 into your 401(k). This solution only works if you are not already maximizing your contributions to your 401(k), which for 2022 is $27,000 for anyone over age 50. 
  
  
• If you are married, your spouse still works, and you are already in the habit of co-mingling your combined income into joint accounts, you might obtain additional flexibility from a 401(k) (or similar) offered by your spouse's employer. You may have additional contributions you can now make (up to $27,000 per person for a total of $54,000 assuming your spouse is over age 50 also).  Or, if you are not working but your spouse is, a similar approach to the first bullet point could be followed but done by your spouse. You then use the LOSAP benefit to offset the contributions to the 401(k).
  
  
• You could also utilize a traditional IRA, though the contribution limits are much less and there are income restrictions. The maximum tax-deductible contribution to an IRA for 2022 is $6,000, provided you do not exceed the income restrictions. Similar to the previous two bullet points, you would contribute a tax-deductible amount into your IRA and then use the LOSAP distribution to supplement your income for that year. But again, this only works if you (or your spouse) are still working and has W-2 income to deposit into an IRA. Talk to a financial advisor for more details. 

In all three cases, you are simply deferring federal income tax to a later point in life. Unless the federal tax code is changed, you will ultimately pay federal income tax of some amount (the tax rate could be different) on this income when you receive a distribution from your 401(k) or IRA.

State tax is a little more tricky, in particular for those that live in NY State and plan on remaining here. Under current NY State tax law, a non-lump sum payment from a LOSAP to an individual over age 59 1/2 can be subtracted from your NY State taxable income in the year of distribution. Therefore, anyone who qualifies for this exemption will not pay NY State income tax on their LOSAP distribution. However, if you took one of the approaches above, once that income is deposited into the 401(k) or IRA the distribution you receive later will no longer be a LOSAP distribution. As such, you essentially lose the special tax exemption for a LOSAP distribution here in New York. There are other exemptions and tax-strategies that can be considered, so it is very important to review these possible strategies with your own tax and financial advisor. 

Firefly Admin Inc. does not provide income tax advice or legal advice. This article is general information, is not meant to be an authoritative or exhausted analysis of all possibilities, and is not legal or tax advice. You are strongly encouraged to seek the help of a qualified tax and legal professional before receiving a LOSAP distribution or implementing any strategies theorized in this article.

In our last post we reviewed Section 215 of the New York State General Municipal Law (GML), which is entitled "Purpose". We saw that this section of the statute states that a LOSAP is not guaranteed by the State constitution like the retirement system. The benefits provided by the retirement system are constitutionally guaranteed, which is why the tier system had to be implemented. With each new tier of benefits, newly hired employees were eligible for a different set of benefits than were provided under prior tiers. Ultimately, this section of the law is stating that does not apply to LOSAP.

This appears to be further validated when reading Section 216(3)(e) of the GML, which states in part:

Amending a LOSAP is a well-established procedure, and there is no doubt that a sponsor may amend the program. In most cases, the amendment is intended to improve the benefits provided by a program.

However, the statute also gives the sponsor the ability to abolish the program. The term “abolished” is used only in this section of Article 11-A of the GML, with no other reference or definition. Typically, when a term is not defined specifically in a statute, then the generally accepted definition of the term is then used when interpreting the law. The word “abolish” means is to end the effect of a practice or to annul or destroy the practice. Therefore, it would seem this section of the law gives a municipal sponsor the authority to just "cancel" the plan and stop paying current or promised benefits. 

To our knowledge, a LOSAP has never been abolished in this way. That would certainly be unpopular! We are aware of programs that have been "terminated", which will be discussed in a future post. 

As usual, if you have questions about the interpretation of the General Municipal Law or this article, we suggest forwarding it to your legal counsel for more guidance. 

Volunteer firefighter LOSAPs in New York are governed by the General Municipal Law (GML). Article 11-A of the ​GML contain the relevant sections (214 through 219-a) that authorize volunteer firefighter LOSAPs. Most attention is paid to the sections that provide the detail on establishing a plan, the point system, and the benefits that can be provided - those are clearly important parts of the law. What is often overlooked is the very first section - section 214. This section is entitled "Purpose" and the text is as follows: 

There are three takeaways from this section of statue:

• Section eighteen (18) of Article one (1) of the constitution basically states that the legislature can enact laws to provide for the protection of safety of the lives, health and safety of employees and to also provide compensation for injuries or upon the death of an employee. It appears to only deal with compensation for injuries or death of employees, which is curious as the LOSAP provides direct payments to volunteers, not just in the event of death or injury (disability). Regardless, referencing this section of the constitution seems to establish the authority under which the legislature created Article 11-A.
  
  
• The relationship between the sponsoring municipality and the volunteer firefighter is that of an employer and employee. This ended up being an important arguing point for the Equal Employment Opportunity Commission (EEOC) lawsuits for age discrimination.
    
• The final sentence in 214(1) references section seven (7) of article five (5) of the constitution. Here is the relevant text of that section of the constitution:
  
  (a) After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired.
  
  In other words, the statute is clearly stating that the benefits provided by a LOSAP are not constitutionally guaranteed like the retirement system is. The implication is that LOSAP benefits could be diminished or impaired, or perhaps even eliminated or abolished completely. The term "abolish" is used in section 216 of the GML. 

This last bullet point is an important one in understanding the nature of LOSAP, and helps to inform and clarify some of the remaining parts of the statute. These will be explored in future posts.