Tax Forms and Changes in Social Security Rules

01/30/2012

Tax Forms and Changes in Social Security Rules

To: Agents & Field Management

From: Human Resources Department

Summary

This Field News summarizes the information that New York Life must file with the Internal Revenue Service about the income and benefits credited to agents in 2011. It also provides general guidance about the forms and amounts that agents should use when filing their individual income tax returns.

Tax Information Reports

TAS Agents: Training Allowance Subsidy (TAS) Plan agents will continue to have all of their income reported

on IRS Form W-2. All of this income, including Agent Expense Allowance, is considered wages for Federal income tax, FICA, and State and Local income tax purposes.

Established Agents: Established agents who are not retired will receive a "Statutory Employee" Form W-2,

which will include all of their commission income and, as appropriate, Agent Expense Allowance, Group Term Taxable Income (GTTI), Council travel expense allowance and any other amounts required to be reported as taxable compensation on Form W-2. Agents who received distributions from the 401(k) Savings Plan (Agents Progress-Sharing Investment (APSI) Plan) during 2011 will also receive IRS Form 1099-R.

Retired Agents: Agents who have retired under the NYLIC Retirement Plan may receive one or more of the

following tax forms:

Form 1099-R, which will reflect distributions from the NYLIC Retirement Plan, 401(k) Savings Plan and, if applicable, Long Term Disability payments.

Form W-2 for commissions on business written prior to their retirement date and, if applicable, GTTI, Council travel expenses allowance, any Supplemental Senior NYLIC Income payments, and

Nonqualified Retirement Income.

Form 1099-MISC for commissions on business written after their retirement date, along with any applicable Agent Expense Allowance.

The amounts reported on these forms are taxable for Federal income tax purposes. However, some states and municipalities exempt all or part of Retirement (Pension) Income from state and local income taxation.

Deferred Compensation Plans: Agents who have participated in a Deferred Compensation Plan (i.e., Senior

Nylic Accumulation Plan (SNAP), Deferred First-Year Commission Plans), and who are currently receiving a payout from these plans will receive either a Form W-2 or Form 1099-MISC, which will include both the principal and interest portions of this payment. (Form W-2 is used to report payout of amounts deferred when the agent was a statutory employee. Form 1099-MISC is used to report payout of amounts deferred after the agent's retirement.)

Year-End Debit Balance: The tax law requires that all amounts made available to an agent (credited to the

ledger) be reported as wages, even though some of the amounts may later be reversed. A year-end adjustment was made for agents who had debit balances as of Dec. 31, 2011, so that any debit balance is reported on IRS Form W-2 as additional compensation. This procedure was then reversed at the beginning of January 2012, and the debit balances were restored to their ledgers. Amounts credited to agents' ledgers during 2012 that are applied to reduce this debit balance will not be reported as income for 2012.

Agents' Income Tax Returns

Established agents who have not retired under the NYLIC Retirement Plan are independent contractors and are treated as employees under the Internal Revenue Code for FICA tax and certain other benefit purposes. For these purposes, such agents are classified as "statutory employees," and a check mark is made next to the words "Statutory Employee" on the IRS Form W-2 (Wage & Tax Statement). Their compensation is reported on Form W-2 so that FICA tax withholding can be reported.

As noted above, established agents who have not retired under the NYLIC Retirement Plan are independent contractors and are treated as "statutory employees" for limited purposes. They should report their statutory employee income, as well as their business expenses, on Schedule C of their income tax returns (Form 1040). The amount shown as wages on an established agent's Form W-2 should be reported on line 1 of Schedule C (not on Page 1 of Form 1040), and the agent should put an "X" in the box on Schedule C for statutory

employees. No Self-Employment Tax (SECA) needs to be calculated in connection with the income reported on this Schedule C; the employee share of FICA tax has already been withheld with respect to the income

reported on the IRS Form W-2 and matched by New York Life.

Agents who are credited with other insurance-related income (that is, income reported on IRS Form 1099-MISC) should complete a separate Schedule C for that income. They should allocate their insurance-related business expenses between the two Schedule Cs. They will have to calculate and pay SECA taxes on the net earnings from self-employment reported on the second Schedule C related to the Form 1099-MISC.

Note: Training Allowance Subsidy Plan (TAS) Agents are common-law employees of New York Life, not

independent contractors. As such, their unreimbursed business expenses can be reported only as miscellaneous itemized deductions on Schedule A, subject to the 2 percent floor on such deductions.

FICA Tax and Social Security Benefit Aspects

of Senior NYLIC Income and Retirement Income

Agents who have not retired under the NYLIC Retirement Plan (except agents operating under TAS agreements) are not employees of New York Life under regular common law tests, as noted above. Such Agents are deemed to be "employees" only for Social Security tax and certain benefit purposes by law, which classifies full-time life insurance agents as "employees" for such purposes. Section 3121(d)(3) of the Internal Revenue Code ("IRC") provides for this treatment.

FICA Tax (Social Security and Medicare Tax):

a. Pre-Retirement Income

All amounts credited by New York Life to agents who have not retired under the NYLIC Retirement Plan are deemed to be "wages" for the purposes of computing FICA taxes. These "wages" include, among other items, first-year commissions, renewal commissions, Senior NYLIC Income, Drawing NYLIC Income, Premium Drawing NYLIC Income, Agent Expense Allowance, and the value of Nonqualified Retirement Income accruals, if any. New York Life is required to both withhold and to pay FICA taxes on such amounts. For 2011, the rate of employee tax was 5.65 percent of the first $106,800 of earnings (4.2 percent for Old Age, Survivors, and Disability Insurance (OASDI) plus 1.45 percent for Medicare), and 1.45 percent on all earnings over $106,800. Due to a temporary tax law change, for 2011, the 4.2-percent employee OASDI rate was two percentage points lower than the otherwise applicable 6.2-percent rate. Due to another temporary tax law change, for 2012, the 6.2-percent employee OASDI rate is effectively reduced to 4.2 percent only for the first two months of 2012 and only on earnings up to $18,350. If this temporary tax law change is not extended for the

remainder of 2012, the 7.65-percent combined rate (OASDI and Medicare) will effectively apply for the remainder of 2012, up to $110,100 of earnings, and the 1.45-percent Medicare rate applies to all earnings over $110,100. Payment of these taxes continues regardless of the age of the agent. Given that this reduction in the OASDI rate is currently only effective for the first two months of the year, there are special rules for calculating this amount. Please note that if this temporary law change is extended for all or a portion of the remainder of 2012, the rules for calculating the OASDI rate for the remainder of 2012 may vary.

The inclusion of Senior NYLIC Income, Drawing NYLIC Income, Premium Drawing NYLIC Income, Agent Expense Allowance, and the value of Nonqualified Retirement Income accruals, if any, in the Social Security tax base permits many agents to receive higher Social Security benefits. In many cases where commission income in a year is less than the maximum amount subject to the 4.2 percent (or 6.2 percent) OASDI rate, the inclusion of the above mentioned incomes/allowances raises the level of taxable earnings, which in turn raises the individual's "average indexed monthly earnings" upon which Social Security benefits for the individual and his/her family members are based.

b. Post-Retirement Income

Qualified Retirement Income credited under the NYLIC Retirement Plan, whether as Early Retirement, Normal Retirement, or Deferred Retirement Income, is not subject to FICA tax. This income is reported on

Form 1099-R for the year it is paid.

Once an agent retires, he or she no longer is considered an employee for FICA tax purposes. If the agent continues to operate under a Retired Agent's Contract, he or she will be considered self-employed for tax purposes. Any commissions or other payments credited on business written after retirement would be subject to SECA, except that no SECA tax is due if all of the retired agent's self-employment income (SEI) is less than $400. In 2011 the rate for SECA was 13.3 percent of the first $106,800 of SEI (10.4 percent for OASDI and 2.9 percent for Medicare) and 2.9 percent of all SEI over $106,800. Due to a temporary tax law change, for 2011, the 10.4-percent OASDI rate was two percentage points lower than the otherwise applicable 12.4-percent rate. Due to another temporary tax law change, for 2012, the 12.4-12.4-percent OASDI rate is effectively reduced to 10.4 percent only for the first two months of 2012 and only on earnings up to $18,350. If this temporary tax law change is not extended for the remainder of 2012, the 15.3-percent combined rate (OASDI and Medicare) will effectively apply for the remainder of 2012, up to $110,100 of SEI, and the 2.9-percent rate applies to all SEI over $110,100. Given that this reduction in the OASDI rate is currently only effective for the first two months of the year, there are special rules for calculating this amount. Please note that if this temporary law change is extended for all or a portion of the remainder of 2012, the rules for calculating the OASDI rate for the remainder of 2012 may vary.

Typically, 50 percent of the SECA tax is allowed as a deduction for Federal income tax purposes. However, under a special rule that applies only for 2011 and for up to $18,350 of SEI in 2012, the deduction for SECA taxes is modified from the generally applicable 50% amount of the total SECA tax, to an amount equal to 59.6% of the OASDI portion of the SECA tax plus 50% of the Medicare portion. Please note that if the temporary law change reducing the OASDI rate for the first two months of 2012 is extended for all or a portion of the remainder of the year, the rules for calculating this deduction for 2012 may vary.

Commissions credited to retired agents are reported on Form 1099-MISC, and the agent pays the SECA tax with his or her Federal income tax.

Commissions and other payments credited after retirement on business written prior to retirement will continue to be taxed at otherwise applicable FICA rates, as described above, subject to applicable limits, if any.

c. Withholding of FICA on Non-Qualified Benefit

IRC section 401(a)(17) limits the amount of earnings that can be used to calculate benefits under the NYLIC Retirement Plan. For 2011, the limit on earnings was $245,000. For 2012, the limit increases to $250,000. Any benefits under the NYLIC Retirement Plan that are attributable to earnings over the IRC section

401(a)(17) limit are credited as nonqualified benefits and are treated as wages for FICA tax purposes. For P7, N8 and N9 agents who are vested under the NYLIC Retirement Plan, this will increase taxable FICA wages in any year that earnings are above the section 401(a)(17) limit. To calculate the amount of additional wages for FICA tax purposes for a given year, we estimate the increase in the present value of the nonqualified

benefit for that year and add that amount to W-2 FICA taxable wages. Such amounts are subject to applicable FICA withholding taxes, which are deducted from the agent's ledger.

IRC section 415(b) limits the amount of benefits annually payable from a qualified defined benefit plan, such as the NYLIC Retirement Plan. For 2011, the limit on benefits annually payable was $195,000. For 2012, the limit increases to $200,000. Any benefits under the NYLIC Retirement Plan in excess of the applicable section 415(b) limit are credited as nonqualified benefits and are subject to FICA tax when an agent retires. We calculate the present value of this nonqualified pension benefit, if any, and include this value in FICA taxable wages on a one-time basis as of the retirement date. This amount is subject to applicable FICA withholding taxes, which will be deducted from the agent's ledger.

For agents who retired or severed service with the Company before October 13, 2005, an agent's annual qualified pension benefit under the NYLIC Retirement Plan will reflect changes in the IRC Section 415(b) limit during an agent's retirement. This limit changes periodically based on year-to-year changes in the cost of living. As noted above, for 2011 the limit on qualified pension benefits annually payable was $195,000. For 2012, the limit increases to $200,000. For agents who retired or severed service with the Company on or after Oct. 13, 2005, the NYLIC Retirement Plan freezes the IRC Section 415(b) limit at the level in place at the time of the agent's retirement or severance from service with New York Life. The IRC Section 415(b) limit for agents who retired or severed service with the Company in 2011 will always be $195,000. The limit for agents who retire or sever service with the Company in 2012 will always be $200,000.

Agents who are eligible for Senior NYLIC Income (those with N6 and prior contracts) may be subject to FICA tax in a somewhat different manner with respect to nonqualified benefits credited under the Nylic Excess Benefit Plan. Specifically, when an agent who is eligible for Senior NYLIC Income retires, we determine if any of his or her benefits under the NYLIC Retirement Plan are subject to the section 401(a)(17) and/or 415(b) limits, as described above, and thus credited as a nonqualified benefit. If the agent is subject to these limits, we calculate the present value of any benefits in excess of such limit and include the appropriate amount in taxable FICA wages at that time. This amount is subject to applicable FICA withholding taxes, which is deducted from the agent's ledger.

d. Withholding of FICA on Senior Nylic Accumulation Plan (SNAP) Benefits

Accumulations under SNAP are not taxable for FICA tax purposes until vesting occurs (the agent is entitled to payments). On Jan. 1 of the year following vesting, the full account balance is subject to FICA tax. An

automatic distribution will be made by FUELS to calculate the FICA tax withholding on the agent's account balance and record it as a distribution. The distribution from the SNAP account to handle the FICA liability is subject to ordinary income tax and will also be automatically deducted from the agents' SNAP account. Additional SNAP credits after vesting are FICA taxed in the year credited to the SNAP account.

Withholding on Retirement Benefit Payments from the NYLIC Retirement Plan:

Monthly pension payments from the NYLIC Retirement Plan are subject to Federal, and, in certain cases, state income tax withholding unless the recipient has elected not to have withholding apply, where such elections are permissible.

Retired agents who have not previously done so may elect not to have federal withholding apply to their monthly pension payments by calling the Benefits Center at 1-888-513-4636 or by logging onto the "Your Benefits Resources" (YBR) Web site at http:www.resources.hewitt.com/newyorklife. If Federal income tax is to be withheld, the number of withholding allowances (exemptions) and marital status should be indicated. Federal income tax will then be withheld as if a payment of wages was being credited, and the amount withheld will be based on the marital status and the number of allowances claimed. If withholding of an additional whole dollar amount is desired, the agent should contact the Benefits Center or update their withholding election on YBR.

have three options: (1) They may elect not to have withholding apply; (2) they may vary the number of withholding allowances (exemptions) or additional withholding amount so that more or less Federal income tax will be withheld as discussed above; or (3) they may continue to have the same amount of tax withheld. Any previous election made, including the number of allowances and marital status previously claimed, will remain in effect until the election is revoked or a different number of allowances or a different marital status is claimed. You can revoke your choice at any time. Any choice or revocation will be effective no later than the first of the month following the 30-day period after your choice or revocation is received. You can make and revoke your choice not to have withholding apply as often as you wish. To make or revoke your withholding choice, you can access the Your Benefits Resources Web site or call the New York Life Benefits Center. If an election form has previously been completed electing not to have withholding, it is not necessary to complete a new election form unless withholding is now desired. If no election has been filed with New York Life, Federal income tax will be withheld automatically from the monthly retirement benefits as if the recipient were a married individual claiming three withholding allowances (exemptions). Generally, under such

circumstances, no Federal income tax will be withheld if the total annual retirement benefits are less than a certain amount. The 2011 amount was $22,700; the 2012 amount is $23,300.

The number of exemptions claimed when making your election, need not be the same as those claimed on the recipient's own income tax return or on any other withholding form. However, if enough income taxes are not withheld from the pension payments, recipients may be responsible for payment of estimated taxes. Penalties and interest may be incurred under the estimated tax rules if withholding and estimated payments are not sufficient.

Social Security Benefits:

After an individual begins to receive Social Security Benefits, his or her continuing earnings can affect these benefits. An individual who had not yet attained Social Security's normal retirement age in 2011 was entitled to full Social Security Benefits during the year if his or her total "countable annual earnings" did not exceed $14,160. An individual who reached Social Security's normal retirement age in 2011 was entitled to full Social Security Benefits for those months prior to reaching normal retirement age, provided that his or her total "countable annual earnings" did not exceed $37,680. In 2012, the amounts increase to $14,640 and $38,880, respectively. Agents who have reached normal retirement age may earn any amount without losing benefits, starting with the month in which they reach that age. In the event earnings in the preceding months of the year do exceed the exempt amount, the individual reaching normal retirement age during the year loses Social Security benefits at the rate of $1 of Social Security Benefits for every $3 of countable earnings over the threshold. For years before the year in which the agent reaches normal retirement age, the loss of benefits will be at the rate of $1 of benefits loss for every $2 of excess annual earnings.

In the first calendar year in which an individual receives benefits, there is also a monthly earnings test. Individuals will receive full benefits in any month in which earnings do not exceed the monthly exempt amounts. In 2011, that amount for individuals under normal retirement age was $1,180 per month. In 2012, the amount increases to $1,220.

The Social Security Administration takes the position that an agent, until he or she retires under the NYLIC Retirement Plan, is classified as an employee and must include in "annual earnings" (for benefit purposes) for the year of the sale the full amount of potential commissions on any policy sold. This would include first-year commissions, as well as the full amount of all potential renewal commissions. Any commissions credited by reason of sales in prior years and any monthly Drawing or Senior NYLIC Income is excluded. Thus, while new sales may result in the reduction of benefits, the receipt of Drawing or Senior NYLIC Income will not have this effect.

If the agent loses any Social Security Benefits because of the inclusion of potential commissions in "annual earnings" and it later develops that the agent will not be credited with the commissions, the Social Security

Administration will, upon request, make a re-computation excluding the commissions and pay the adjusted benefit at that later date.

Agents receiving Retirement Income under the NYLIC Retirement Plan are classified as self-employed for tax purposes and must include in their "annual earnings" (for benefit purposes) all commissions actually credited on sales made after their Retirement Date. This amount is reported on Form 1099-MISC. They would not include Retirement Income or commission payments credited on business written prior to their Retirement Date.

Calculation of earnings for retired agents for tax and "earnings test" purposes is done on a net basis so that proper business expenses can be deducted. Agents who have not retired under the NYLIC Retirement Plan must report earnings for Social Security Tax benefits and "earnings test" purposes on a gross basis without any deduction for business expenses.

For More Information

This Field News is intended to provide general information regarding your tax forms. However, you may have been credited with payments in 2011 from benefit plans other than those discussed above. If you have specific questions relating to your tax forms, they should be directed to the New York Life InfoLine at (888) 513-4636). When prompted, state "Nylic Income and/or 1SN/2SN" to reach a representative.

Questions relating to Social Security or Benefits should be directed to the New York Life InfoLine (888) 513-4636). When prompted, state "Retirement Plan" to reach a representative.

Required IRS Circular 230 Disclosure

This Field News contains a discussion of one or more tax-related subjects that provides general information only. It is not intended (and cannot be used) by any taxpayer for the purpose of avoiding any IRS

penalties that may be imposed upon the taxpayer in his or her own individual circumstances.

Taxpayers should always seek and rely on the advice of their own independent tax professionals. Please understand that New York Life, its subsidiaries, agents and employees may not provide legal or tax advice.