• Behold: New State Withholding Requirements on Retirement Plan Distributions are Effective Soon!
  • December 9, 2011 | Authors: Frank E. Berrodin; Sara Tountas
  • Law Firm: Miller Johnson - Grand Rapids Office
  • As part of Governor Snyder's plan to improve the business climate in Michigan by cutting business income taxes, the Michigan state income tax exemption that currently applies to most retirement plan distributions will be greatly reduced effective January 1, 2012. Additionally, payors of retirement plan benefits must begin withholding Michigan state income taxes on many retirement plan distributions made on or after January 1, 2012. The new withholding requirements apply to distributions from defined benefit pension plans, IRAs and most defined contribution plans (such as 401(k) and 403(b) plans).

    In general:

    • the existing state income tax exemption continues to apply to participants born before 1946;
    • a reduced exemption of $20,000 per year for singles or $40,000 per year for married couples applies to those participants who were born after 1945 and before 1953; and
    • no exemption applies to participants born after 1952.1

    There is still some uncertainty regarding the specific withholding requirements. Nonetheless, beginning January 1, 2012, payors of retirement plan distributions should do one of the following unless they receive a Form MI W4-P from the participant:

    • If the participant was born before 1946, do not withhold unless the payments exceed the existing exemption amount ($45,842 for single and $91,684 for married couples); or
    • If the participant was born after 1945, withhold on all taxable payments at a rate of 4.35%.

    Participants may elect to have a different amount withheld, including no amount, by completing and returning Form MI W-4P. If a payor receives a completed Form MI W4-P, it should withhold based on the participant's election.

    All participants who were born after 1945 who receive a distribution from a retirement plan after January 1, 2012 should be given a Form MI W-4P before the distribution is made. If your retirement plan allows periodic payments (like installments or annuities), then any participants who are currently in pay status should be informed of the new withholding requirement as soon as possible to give them time to elect the appropriate withholding amount from the first payment they receive in 2012.

    Please contact any member of our Employee Benefits practice group if you have any additional questions about the new withholding requirements.

    1 Although the law limits the exemption for the participants born after 1945 and before 1953 to those with household resources less than $75,000 if single or $150,000 if married, this portion of the law was recently struck down by the Michigan Supreme Court.