Withholding for Pension Administrators Frequently Asked Questions (FAQ)

 

Changes to Pension Withholding and Who Will be Affected

  1. Which pension benefits will be taxed?

    Under Michigan law, qualifying pension and retirement benefits include most payments that are reported on a 1099-R for federal purposes. This includes defined benefit pensions, IRA distributions, and most payments from defined contribution plans.

    Payments received before the recipient could retire under the provisions of the plan or benefits from 401(k), 457, or 403(b) plans attributable to employee contributions alone are taxable under Michigan law.

  2. Should taxes be withheld from military pension or railroad retirement benefits?

    No, they are exempt from tax.

  3. What are the changes for recipients born before 1946 (Tier 1)?

    There are no changes for those born before 1946 (Tier 1).

    For recipients born before 1946, all benefits from public sources are exempt and benefits from private sources may be deducted up to $49,027 for a single or married filer filing separately or $98,054 for married filing a joint return for the 2014 tax year. Any private pension payment in excess of the limits above is taxable.

  4. What are the changes for recipients born during the period 1946 through 1952 (Tier 2)?

    For recipients born during the period 1946 through 1952 (Tier 2), the first $20,000 for single filers or $40,000 for joint filers of all private and public pension and retirement benefits may be deducted from Michigan taxable income. Benefits in excess of these limits are taxable to Michigan. Beginning in 2014, taxpayers born during the period January 1, 1946 through January 1, 1948 are eligible for the Michigan Standard Deduction in lieu of a deduction for pension and retirement benefits. The new Michigan Standard Deduction is the same amount dollar amount as the deduction for pension and retirement benefits but may be applied against all income. The pension withholding tables allow taxpayers to incorporate the benefit of the Standard Deduction and generate the appropriate income tax withholding.

  5. What are the changes for recipients born after 1952 (Tier 3)?

    For recipients born after 1952 (Tier 3), all private and public pension and annuity benefits are fully taxable and may not be deducted from Michigan taxable income.

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Registration Process

  1. When should a pension administrator register?

    Pension administrators may register at any time, but should register as soon as you know you have a Michigan resident(s) to which you pay pension and/or annuity payments.

  2. How does a pension administrators register?

    Pension administrators not currently registered for Michigan Withholding Tax must now visit Michigan Treasury Online (MTO).

  3. If a company is currently registered with Treasury for a tax other than Michigan Withholding, does it need to register as a pension administrator?

    Yes, it must register for withholding.

  4. Will companies that use a payroll provider be required to register for pension withholding?

    Yes. If a company is currently registered for payroll withholding, they will need to file a separate Form 518 to register for pension withholding if the payroll provider will not be handling the pension payments.

  5. A pension fund based in another state uses a third party payroll service provider located in Michigan to pay pension benefits on its behalf to Michigan residents. Is the third party provider required to register for and pay Michigan pension withholding?

    Yes. The law requires a person disbursing taxable pension benefits to pay pension withholding taxes. The third party provider is a person over whom Michigan has jurisdiction and disburses pension benefits; therefore, it is required to register for and pay pension withholding taxes.

  6. We are registered to deposit employee withholding with the state. Do we have to register again as a pension administrator in order to deposit the withholding from our members IRA withdrawals? Do we have to deposit IRA withholding separate from employee monthly withholding?

    Generally, IRA withholding payments and returns can be remitted and filed on the same Michigan 160 and 165 forms used for payroll withholding. Additional registration and separate deposits are not required.

    However, if a third party payroll service or administrator is used to file and pay employee withholding, a separate registration must be done for the required IRA withholding.

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Withholding Guide/MI W-4P

  1. If my company did not receive a Pension Withholding Guide, where can I get one?

    The guide is available on the web at www.michigan.gov/withholding.

  2. In the absence of an MI W-4P, can the pension administrators substitute it with the Federal W-4P?

    No

  3. We are tax technical advisors to a number of very large firms administering plans/funds. May a payer accept a substitute Form MI W-4P for purposes of withholding at a lower rate (than the statutory 4.25%) or zero withholding?

    If yes:
    (1) Does the substitute need to be similar to the official form?
    (2) Will Michigan require prior review/approval of the proposed substitute MI W-4P?

    Pension administrators may rely on or use substitute MI W-4P forms. For instance, a fillable form on a pension administrator's website for pension or IRA recipients to complete on line is an acceptable alternative to paper forms.

    In general, the substitute form needs to convey the same basic information that is on the Department's MI W-4P form. The Department is not requiring a review and approval for substitute forms at this time.

  4. What should be done if no MI W-4P is submitted?

    In the absence of an MI W-4P, do one of the following:

    • Do not withhold on benefits paid to recipients born before 1946 (Tier 1) unless the benefits exceed private pension limits ($49,027 single and $98,054 joint).
    • Withhold on all taxable pension distributions at 4.25% if the recipient was born in 1946 or after.
       
  5. Where can I find the withholding tables or the withholding formula?

    The withholding tables and/or withholding formula are available in the Withholding Guide. They can also be located on the website at www.michigan.gov/withholding.

  6. Can the withholding table or withholding formula be used for everyone?

    No. The withholding tables and/or withholding formula found in the Pension Withholding Guide are only for recipients that were born during the period 1946 through 1952 (Tier 2) and for whom an MI W-4P has been received.

  7. What is the difference between the single and joint withholding tables?

    The pension tax withholding tables included in the Pension Withholding Guide incorporate the deductions of $20,000 for single or married filing separate, and $40,000 for married filing a joint return, assuming benefits are paid monthly. Recipients who indicate on the MI W-4P they are married (withhold as single) should have withholding computed as if they are single.

  8. What is the 4.25% formula for those born between 1946 and 1952 (Tier 2)?

    Withholding = [Pension or Retirement Payment subject to federal income tax – Monthly pension deduction – (Allowance per Exemption x Number of Exemptions)] x 4.25%

     
    Monthly Deduction Amounts
    Single pension deduction…………
    $1,666.67
     
    Married pension deduction…………
    $3,333.33
     
    Personal exemption allowance…………
    $333.33
     

    Example:

    Pension Payment $2,100 (-) Single Pension Deduction $1,666.67 = $433.33

    $433.33 (-) ($333.33 x 1 Exemption) = $100.00

    $100.00 x 4.25% = $4.25 Monthly Withholding

  9. What is the withholding rate for those born after 1952 (Tier 3)?

    For recipients born after 1952 (Tier 3), all pension and retirement benefits are taxable. Use the monthly withholding table from the Michigan Income Tax Withholding Guide (Form 446) to calculate the appropriate withholding based on the number of personal exemptions claimed on the MI W-4P. This guide can be found online at www.michigan.gov/withholding.

  10. Can a pension recipient change their number of personal exemptions at any time?

    Yes, by submitting an updated MI W-4P to their Pension Administrator.

  11. We have clients whose marital status reflects one of the following: A widow(er) or divorced. When they complete the MI W-4P, which box should be checked?

    Single.

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Withholding Information for Pensions, Annuities and other Retirement Payments

  1. Our organization is a 501(c)(3) Type I supporting organization. We do not file a Form 990.  We are a religious organization. What responsibility do we have to withhold on a Charitable Gift Annuity (CGA) for a MI beneficiary?

    A 501(c)(3) organization making annuity payments to beneficiaries through a charitable gift annuity plan is subject to Michigan pension withholding on the taxable portion of the distributions. In general, the taxable portion of distributions subject to Michigan withholding will be the taxable amount that is reported to the beneficiary at the end of the year in box 2a of the federal 1099-R form.

  2. Do the new mandatory withholding requirements apply to trusts receiving IRA distributions as the beneficiary of an IRA?

    An IRA custodian or administrator is subject to Michigan’s pension withholding tax on any distributions that will be subject to Michigan income tax at the end of the year in the hands of the beneficiary. Distributions paid to a trust as an IRA beneficiary will be taxable at the end or the year and are subject to pension withholding.

  3. We are financial planners and are working with a custodian to withdraw money from a Roth IRA for one of our clients. Is a distribution from a Roth IRA taxable and subject to the 4.25% withholding?

    Law (MCL 206.703) requires pension withholding on any IRA distributions that will be subject to Michigan tax at the end of the year on the beneficiary’s Michigan income tax return. In general, distributions from Roth IRAs are exempt from both Michigan and federal income taxes, and no pension withholding would be required.

    However, if part of the distribution is taxable, then Michigan pension withholding would be required on the taxable portion of the distribution. A portion of the distribution from a Roth IRA may be taxable when a recipient receives a nonqualified distribution. Nonqualified distributions from Roth IRAs are determined by reference the Internal Revenue Code.

  4. A pension administrator withholds on a retiree’s distribution in January and pays the withheld money to the Department in February. The pension administrator later discovers that the distribution was not subject to income tax. How can the retiree recover the withheld tax?

    In most cases, the pension administrator could directly refund the withheld amount to the retiree. Pension administrators can use the same procedures that are available to employers under the Michigan Administrative Code R 206.22(1). The rule provides that “[i]f an employer over withholds income tax from an employee’s wages, or if he withholds Michigan tax where he should not have withheld Michigan tax, he may repay the amount withheld in error to the employee at any time within the same calendar year. … The employer may adjust his records internally and deduct the amount refunded from the tax owing on his next tax return ….”

    Example.   A pension administrator deducted $150 from George’s January pension distribution and paid the withholding to the Department on its January return. However, George was born in 1939 and owes no tax on his pension. The pension administrator could pay George the $150 that was mistakenly withheld and then reduce its February withholding payment to the Department by $150. The pension administrator would simply have $150 too much in its January monthly withholding return and $150 too little in its February monthly withholding return. At the end of the year when the pension administrator files its Sales Use and Withholding annual return (form 165) it would reconcile its total withholding for the year against its monthly returns and against the withholding reported on 1099Rs.

    If the pension administrator is unable to repay the retiree by way of internal adjustments to its monthly withholding returns, the retiree will not be able to seek a refund from the Department until the retiree files an income tax return following the close of the tax year.

  5. Is there a minimum one time distribution amount from a taxable pension distribution that does not require Michigan tax withholding?

    One time distributions from employer retirement plans or IRAs are only subject to Michigan pension withholding if the distribution exceeds the exemption allowance for the number of personal exemptions claimed on line 5 of the MI W-4P.

    Note: This applies to any one time distribution not just those that fall under the minimum distribution rules.

    For a person claiming one exemption in 2013, the distribution would have to be in excess of $3,950. For a person claiming 0 exemptions, withholding payments of less than $1 are not required.

  6. Due to the 2012 changes, are Michigan withholding requirements on distributions from an Employee Stock Ownership Plan (ESOP) voluntary or mandatory?

    Michigan's new pension withholding requirements are mandatory on retirement or annuity payments that will be taxable to the recipient and reported by the payor on a 1099-R form at the end of the year.

    If distributions from an ESOP retirement plan meet these conditions, Michigan's pension withholding is mandatory except to the extent provided for on a MI W-4P submitted by a recipient.

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Payments/Filing

  1. How can I make withholding Payments?
    • By Mail
      • Use Form 160 (either monthly or quarterly)
    • By electronic filing
      • Must complete EFT application (Form 2248)
      • Eliminates requirement to file monthly or quarterly paper returns
        • Must file paper Annual Return (Form 165)
  2. How often do I make payments?
    1. If the annual tax due is less than $750 the company should file and pay annually. Use Form 165 and submit by mail.
    2. If the annual tax due for the year is between $750 and $3,600 the company should file and pay quarterly. Use Form 160 and submit by mail. Companies within this range also have the option to register for EFT payments. In doing so, the company must make monthly payments, instead of quarterly payments. The Form 160 and payment are submitted electronically if the company chooses to register for EFT The annual return, Form 165, must be filed and submitted by mail.
    3. If the annual tax due for the year is over $3,600 the company must file and pay monthly. Use Form 160 and submit by mail. Companies within this range also have the option to register for EFT payments. The Form 160 and payment are submitted electronically if the company chooses to register for EFT. The annual return, Form 165, must be filed and submitted by mail.
  3. What is the threshold for electronic filing?

    Electronic filing can be used to submit payments and file monthly or quarterly returns. Companies expecting to pay more than $40,000 each month are required to pay by EFT.

    The Annual Return for Sales, Use and Withholding Taxes (Form 165) cannot be submitted electronically and must be paper filed. Visit www.michigan.gov/business or see the instructions for Form 165 for filing requirements.

  4. How do I report at the end of the year?

    Include any Michigan withholding reported on a 1099-R on Form 165. See the Sales, Use, and Withholding Tax Forms and Instructions (Form 78) for more information on filing Form 165.

  5. We are registered to deposit employee withholding with the state. Do we have to register again as a pension administrator in order to deposit the withholding from our members IRA withdrawals? Do we have to deposit IRA withholding separate from employee monthly withholding?

    Generally, IRA withholding payments and returns can be remitted and filed on the same Michigan 160 and 165 forms used for payroll withholding. Additional registration and separate deposits are not required.

    However, if a third party payroll service or administrator is used to file and pay employee withholding, a separate registration must be done for the required IRA withholding.

Withholding for Pension Administrators

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