For years, Troy officials and messaging have leaned on a scary-sounding claim:
Volunteer firefighters would have to pay taxes “now” on VFIP money they haven’t even received yet.
If that were true as a blanket rule, it would indeed be a big problem. But when you line up:
- what the IRS actually ruled,
- what Troy’s 2020 Amended VFIP actually says, and
- what “taxable now” means under basic IRS vesting/forfeiture doctrine, the “inevitability” narrative doesn’t hold.
1) What Troy publicly told residents
Troy’s own public-facing VFIP “Upcoming Changes” page states the key talking point plainly:
- The IRS “declared” the plan has tax consequences, and
- Keeping the plan “would require many participants to begin paying income taxes on benefits when they vest and BEFORE they begin receiving payments.”
That is the core claim: taxes triggered at vesting, before payment. That statement is not automatically false as a tax concept, it can happen in some plan designs, but whether it happens depends on how the plan is structured, especially whether the benefit is still forfeitable (i.e., can still be lost).
And here’s the key: Troy’s own 2020 VFIP is explicitly revocable and contains multiple forfeiture hooks.
2) The IRS letter Troy actually had (and what it actually says)
The only IRS document that has been widely produced publicly (and is easy to verify) is the IRS Private Letter Ruling PLR-145218-14. What that IRS letter is about:
- It responds to a request for a ruling that the Trust’s income is excludable under IRC §115.
- It describes the VFIP trust and the fact it provides “length of service incentive” benefits for volunteer firefighters.
- It explicitly states: “Neither active or former volunteer firefighters … have any … beneficial ownership interest in any asset of the Trust.”
- It also says the “Trust may be terminated by the City,” but remaining assets are used to provide benefits under the trust and leftovers return to the City after obligations are satisfied.
- And it explains the §115 framework for excluding trust income tied to essential governmental functions.
What that letter does not do:
- It does not order Troy to terminate the plan.
- It does not say firefighter incentives are prohibited.
- It does not say firefighters must immediately be taxed on unreceived benefits regardless of plan design.
In other words: the IRS letter is about trust income exclusion under §115 and describes the trust/benefit structure. It isn’t an instruction to kill the plan. That matters because Troy’s public messaging has often been framed as if the IRS issued a “do this or else” ultimatum. The publicly verifiable document does not read that way.
3) The 2020 VFIP is explicitly revocable (Troy can amend/terminate it)
Let’s go straight to Troy’s 2020 Amended City of Troy Incentive Plan for Volunteer Firefighters (the agenda PDF includes the full “Amended … Plan,” with the relevant sections intact).
Amendment and termination power (Section 1:107). The plan states:
- “The provisions of the Plan may be amended at any time by the City Council…”
- “The City reserves the right to modify or terminate the Plan and/or the benefits payable… at any time…” (after a public hearing).
- Termination “shall not affect” incentive payments already made, or “otherwise payable” at termination if trust assets remain.
So yes: the plan is revocable. That part is not a debate. But here’s the critical point: revocable plan ≠ taxable now. Revocability (and forfeiture conditions) are the exact reasons that “taxed now on money you don’t have” is usually not the default outcome.
Once you read the plan itself, a more precise question emerges, not whether the City could terminate the plan, but when, under IRS rules, a firefighter would actually become taxable.
4) The plan also says participants don’t automatically gain a legal right against the City
This is another section that undercuts the “you own it now, pay tax now” posture.
Section 1:103(2) states that establishing or modifying the plan, creating any fund/account, or paying benefits “shall not be construed as giving… any legal or equitable right against the City… except as may otherwise be provided in this Plan document.”
That’s a big clue about how the plan is intended to function: benefits arise under plan terms, not as an unconditional “property right” from day one.
| Situation | Plan Revocable? | Benefit Forfeitable? | Tax Risk |
| < 10 years | ✅ Yes | ✅ Yes | ❌ No |
| 10 years, < 55 | ✅ Yes | ✅ Yes | ❌ No |
| 10 years + 55, still serving | ✅ Yes | ❌ No | ⚠️ Possibly |
| Retired & paid | ❌ (as to benefit) | ❌ No | ✅ Already taxed |
Why the City’s Argument Still Fails
The City never said: “At 10 years and age 55, taxation might occur unless the plan is adjusted.”
Instead, the City effectively said: “The plan is illegal because firefighters would be taxed on money they haven’t received.”
That framing is wrong, for several reasons.
First, taxation before vesting would require irrevocability. But the Troy VFIP was explicitly revocable, and benefits remained subject to forfeiture well before eligibility. Under basic IRS doctrine, that alone defeats the claim of early, unavoidable taxation.
Second, taxation at vesting is not a fatal flaw. If taxation could attach at 10 years and age 55, that does not invalidate the plan. It identifies a design issue, not a legal prohibition.
Third, the plan itself explicitly allowed fixes. The VFIP reserved to the City the power to amend, modify, or terminate the plan. That authority could have been used to:
- Delay vesting until separation
- Add continued-service forfeiture language
- Require payment upon eligibility
- Convert the benefit to a pay-as-you-go structure
Finally, many cities solved this exact issue without termination. Clawson is a local, real-world example of a municipality maintaining firefighter incentives while addressing tax timing concerns through design.
In short, the City presented a solvable, narrow tax question as an unsolvable legal catastrophe. That leap, not the IRS, is what ended the VFIP.
5) The real trigger is vesting, which depends on forfeiture risk, not just “time served”
This is the part Troy’s public messaging tends to compress into a misleading oversimplification. The IRS concept is basically:
- If a benefit is still subject to a substantial risk of forfeiture (you can lose it), it’s generally not taxable yet.
- If it becomes nonforfeitable (vested), taxation can become plausible even before cash is paid, depending on the plan’s structure.
So the honest question isn’t “Can the City revoke the plan?” (yes). It’s: When does the firefighter’s benefit become nonforfeitable under the plan? And for Troy’s VFIP, that depends on the plan’s eligibility structure, especially age and separation.
6) Troy’s VFIP eligibility is “10 years + age 55”, and it ties eligibility to termination of participation
Section 1:202(2) is the heart of it. It states that, except as otherwise set forth, a participant is eligible for benefit payments “upon his termination of Participation in the Plan and satisfaction” of criteria, including:
- “Ten (10) years” and “at least age fifty-five (55)”
- Or other thresholds (25 years + age 50; or 30 years regardless of age).
And Section 1:200(2) says participation terminates upon the earlier of termination of duties as a volunteer firefighter or commencement of incentive benefits. This matters because it supports the point we kept circling:
- If you hit 10 years but you’re not 55
- You are still a “Deferred Former Participant” type scenario described in definitions (10 years but not age requirement).
City of Troy - That is not “nonforfeitable cash in your pocket.” You can still lose eligibility by leaving, by a break in service, by plan changes, etc.
- If you hit 10 years and age 55, but you keep serving and do not commence benefits
This is the razor edge: Under many tax regimes, once the benefit is truly nonforfeitable, taxation can attach even if you delay payment. But Troy’s own structure ties eligibility to termination of participation and commencement, which gives Troy multiple ways to draft it so that continuing service keeps a forfeiture condition alive.
In other words: the “phantom tax at 55 while still serving” issue is a plan-design choice. It is not an unavoidable act of God.
7) What Troy says would happen (tax at vesting before payment) is a design problem, not a “terminate the plan” mandate
Troy’s public page claims taxation before payment “when they vest.” Even if we accept that as a risk in some versions of the plan, what follows? What follows is not “therefore the only option is elimination.”
What follows is:
“We should adjust the plan so vesting does not occur until the same time as commencement/payment, or so that continued service preserves forfeiture risk.”
That is how these programs are commonly fixed.
8) Specific plan changes Troy could have made to prevent taxability at age 55 if someone kept serving
Here are the concrete design fixes we discussed, written in a way you can quote and defend publicly:
Fix A: Vesting only upon separation (retirement/termination)
Rewrite the plan so that meeting age/service thresholds does not make the benefit nonforfeitable unless the participant actually separates.
Effect: if you hit 55 + 10 but keep serving, you’re still subject to forfeiture (because you haven’t separated), so the “tax now” trigger doesn’t arise.
Fix B: Mandatory commencement once eligible
Instead of allowing indefinite deferral while still working, require commencement once eligibility is met.
Effect: tax matches actual payment, eliminating phantom income.
Fix C: Continued-service forfeiture language
Explicitly state that benefits remain subject to forfeiture until the member separates under qualifying terms.
Effect: keeps substantial forfeiture risk alive, preventing vesting-based taxation while still serving.
Fix D: Convert the benefit to a pay-as-you-go longevity stipend
Move away from deferred pension-like accrual and make the incentive a current-year compensation model.
Effect: tax is straightforward (W-2/1099 style), no deferred-tax controversy, no vesting-based phantom tax.
None of these require terminating the plan. They require choosing a structure.
9) Why “the plan is revocable” does not prove “you’d be taxed on unreceived money”
This is the internal contradiction that never gets addressed cleanly:
- Troy’s plan says the City can amend/terminate it.
- The IRS PLR description says firefighters do not have beneficial ownership in trust assets.
- The plan itself cautions against assuming a legal/equitable right against the City beyond the plan terms.
Those facts point toward: forfeiture risk exists and ownership/control is limited, which are the classic reasons phantom taxation is not automatic. So when a public narrative jumps straight to “firefighters will be taxed now on money they haven’t received,” you should demand the missing step:
Exactly when, under the plan’s terms, does the benefit become nonforfeitable if a firefighter keeps serving?
If that step isn’t proven, the fear claim is just rhetoric.
10) The media framing versus the documentary record
Coverage at the time repeated the City’s framing in various forms, including that the IRS “rejected” or “ended” the old plan and that firefighters faced tax impacts. But even accepting the headlines, the documents show something more specific:
- The IRS PLR is about §115 trust income exclusion and describes a structure where firefighters lack beneficial ownership, and the trust can be terminated by the City.
- The 2020 VFIP is explicitly amendable/terminable and contains detailed eligibility/termination rules that can be drafted to avoid phantom taxation while serving.
- Troy’s own public page admits the tax concern is about “when they vest” before payments, which is exactly the kind of issue plan design can address.
That combination does not produce “we had no choice.” It produces: we had choices, we made one, and then marketed it as inevitability.
11) A plain-English timeline (the whole issue in one picture)
Using the VFIP’s own eligibility language:
Phase 1: Under 10 years
- Leave early → you forfeit credits (plan says service credit is forfeited if you cease active service prior to ten years).
- Not vested → not taxable.
Phase 2: 10 years but under age 55
You’re still not eligible to commence under the 10+55 route. You remain exposed to plan changes, service issues, and definitional rules (Deferred Former Participant concept).
Not vested → not taxable.
Phase 3: 10 years and age 55
This is where the City’s “tax at vesting before payment” argument tries to land. But whether you become taxable while still serving depends on whether the plan makes the benefit nonforfeitable even if you do not separate/commence, and Troy had the power to draft it so that it does not.
Phase 4: Commencement/payment
Once you actually commence and receive benefits, taxation on received payments is not controversial.
12) Closing: the honest way to describe what happened
Here is the most defensible version of the critique: Troy’s own VFIP document was revocable.
The IRS PLR most publicly associated with Troy’s VFIP does not read like a “terminate it” order; it recognizes the governmental-function nature of the program and describes a structure where firefighters do not own trust assets.
Troy’s public messaging says the fear was taxation “when they vest” before they receive payments.
That “vest-before-payment” risk is not proof the plan had to die. It’s proof the plan needed design changes, changes the City had full authority to adopt, because the plan itself allows amendment.
So if the public was told “the IRS made us do it,” the documentary record supports a different conclusion:
The IRS raised tax-structure issues. Troy chose a policy outcome. Then it sold that policy choice as inevitability.
VFIP Tax & Plan Design FAQ
Q1: Was the Troy VFIP revocable?
Yes. The 2020 Amended VFIP explicitly states the City Council could amend or terminate the plan at any time, subject to procedural requirements.
Q2: Does a revocable plan automatically mean firefighters are taxed early?
No. Revocability actually supports deferring taxation, because it creates forfeiture risk. Taxation depends on vesting, not whether the City can change the plan.
Q3: Would firefighters be taxed before receiving money?
Only after all eligibility conditions were met and forfeiture risk was gone, typically at 10 years of service and age 55. Not before.
Q4: If a firefighter hit 10 years but not age 55, would they be taxed?
No. Continued service and age requirements create a substantial risk of forfeiture, which prevents taxation.
Q5: If a firefighter hit 10 years and age 55 but kept serving, would they be taxed?
Possibly, depending on plan design. That is where Troy claimed a problem existed, but it was a design issue, not a legal mandate.
Q6: Could the plan have been changed to avoid taxation while still serving?
Yes. Common solutions include:
- Vesting only upon separation
- Continued-service forfeiture clauses
- Immediate payment upon eligibility
- Pay-as-you-go longevity structures
Q7: Did the IRS ever order Troy to terminate the VFIP?
No. The publicly produced IRS ruling addressed tax treatment and forfeiture timing. It did not prohibit firefighter incentive plans or require termination.
Q8: Could the City still terminate the plan after firefighters vested?
Yes, prospectively. What the City could not do is claw back already-earned benefits.
Q9: So why was the VFIP eliminated instead of fixed?
That was a policy choice, not a legal necessity.
Q10: What is the core takeaway?
The City presented a narrow, solvable tax issue as an unavoidable catastrophe. The documents show otherwise.
Q11: Was it a pension?
