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Are distributions from a deferred compensation plan an allowable subtraction?

Are distributions from a deferred compensation plan an allowable subtraction?

Distributions from an employer plan that contain only deferred compensation are not an allowable subtraction, including the following:

  • Distributions from a 401(k) or 403(b) plan that allows the employee to set the amount of compensation to be deferred and does not prescribe retirement age or years of service
  • Distributions from a 457 plan
  • Distributions that are reported as wages on a form W-2


Subject to limitations based on age and year of birth, the following may qualify as an allowable subtraction:

Distributions from a 401(k) or 403(b) plan are a qualified retirement and pension benefit if they are the result of the employer's contributions only or both employer contributions and employee contributions mandated by the plan. Employee's contributions required by the plan to obtain an employer match are considered mandated.

Note: Distributions attributable to employee contributions that were not mandated by the plan are not eligible for a subtraction.


Qualification for a subtraction is a two-step process.
Use the distribution chart and the information below (step one) to determine whether your retirement and/or pension benefits qualify as a subtraction. Then use the appropriate year of birth category (step two). You must meet both qualification requirements to be eligible for a subtraction.

If you do not qualify based on the distribution chart (step one), then you do not have a qualified subtraction and step two is not applicable.


Step One: 

Refer to box 7 on form 1099-R for your distribution code.

Form 1099-R reports the total retirement and pension benefits you received during the year. The distribution code(s) describes the condition under which the retirement and pension benefits were paid. The chart below lists distribution codes and generally describes eligibility of benefits for subtraction based on each code. Some exceptions exist. If your distribution code is not included in the list below or if you have questions on eligibility of your benefits, consult your tax professional.
 

Form 1099-R Distribution Codes
Form 1099-R Distribution Codes Does the code indicate the distribution is eligible for a Michigan retirement and pension subtraction?
(Limited based on age and year of birth)
1 - Early distribution, no known exception. No.
2 - Early distribution, exception applies. No, unless: Part of a series of mainly equal periodic payments made for the life of the employee or the joint lives of the employee and their beneficiary;
Early retirement under the terms of the plan.
3 - Disability. Yes.
4 - Death. Yes, for surviving spouse only and only if the decedent would have also qualified for a normal distribution under Distribution Code 7 at the time of death.
No, for all other beneficiaries.
No , if paid as a death benefit payment made by an employer but not made as part of a pension, profit sharing, or retirement plan.
5 - Prohibited transaction. No.
6 - Section 1035 exchange. The exchange of life insurance No.
7 - Normal distribution.
  • normal distribution from a plan,
  • distribution from a traditional IRA, if the participant is at least 59½,
  • Roth conversion if the participant is at least age 59½,
  • distribution from a life insurance, annuity, or endowment contract must be 65 and part of a series of mainly equal periodic payments made for the life of the employee or the joint lives of the employee and their beneficiary.
 Yes.
Exception: You may not subtract distributions from a plan that:
  • allows the employee to set the amount of compensation to be deferred
  • does not prescribe the retirement age or years of service
8 - Excess contribution plus earnings/excess deferrals (and/or earnings) taxable in 2020. No.
9 - Cost of current life insurance protection. No.


Step Two:

Choose the appropriate category below. 
Note: For joint filers, use the year of birth of the oldest spouse.

Recipients born before 1946
Recipients born during the period January 1, 1946 through December 31, 1952
Recipients born after 1952

For more information and assistance in calculating your subtraction see Pension Information