What Are Qualifying Retirement and Pension Benefits?

A pension is generally a series of definitely determinable payments made to an employee after retiring. Pension payments are made regularly and are based on factors like years of service and prior compensation. Internal Revenue Service Publication 575. An employee retirement benefit plan is any plan, fund, or program that is established or maintained by an employer or employee organization that provides retirement income to employees. 29 USC 1002(2)(A). Individuals may also have retirement accounts created under various sections of the IRC that may or may not be part of an employer plan, or that may be retirement plans for the self-employed.

The MITA uses the term “retirement or pension benefits” to collectively refer to distributions falling into any one of three categories:

(1) pension trusts and annuity plans that qualify under section 401(a) of the IRC, including self-employment plans such as Keogh or HR 10 plans, certain individual retirement accounts where the distribution is a qualified one, 403(b) plans offered by a 501(c)(3) organization or public school system, and 401(k) plans where employee contributions are mandated by the plan or attributable to employer contributions;

(2) certain plans not qualified under the IRC, including plans created by various levels of governments such as the United States, states other than Michigan, and political subdivisions of this state, as well as church plans, and any plan where the distribution is from a pension trust and the plan prescribes the contributions and retirement eligibility; and

(3) benefits received by a surviving spouse if the benefits qualified for a deduction prior to the decedent’s death. MCL 206.30(1)(f) and MCL 206.30(8).

When referring to retirement or pension benefits as defined under MCL 206.30(8), this RAB will collectively refer to income, benefits, or distributions from either a qualifying retirement or a pension plan as “ retirement income” , “benefits” , or “distributions” .

For tax purposes, the IRC separates retirement benefit plans into two categories: qualified and nonqualified plans. A qualified plan is one that “qualifies” for special tax treatment because it complies with certain IRC provisions. Nonqualified plans defer compensation or otherwise provide benefits payable at retirement or termination of employment that do not qualify under the IRC and are not entitled to favorable tax treatment. To qualify for favorable tax treatment under the IRC, a retirement plan must meet certain standards such as minimum vesting requirements, minimum distribution requirements, and certain nondiscrimination criteria. For Michigan purposes, qualifying retirement benefits include most payments that are reported on a Form 1099-R for federal tax purposes. This includes defined benefit pensions, Individual Retirement Arrangement (IRA) distributions, and most payments from defined contribution plans. The distinction between qualified and nonqualified plans is important because it may allow a recipient to subtract some or all of a distribution that is included in AGI.