The Michigan Department of Treasury (Treasury) is holding that payments from a Section 403(b) plan, which Treasury considers to be analogous to payments from a Section 401(k) plan is subject to Michigan Income Tax.
It is Treasury's position that distributions from such plans are not eligible for the subtraction to the extent they are attributable to employee elective contributions that exceed the employee contribution required by the plan to obtain the maximum employer contribution. For example, if the plan requires employees to contribute 3% to the plan to obtain the maximum employer contribution, the portion of the account balance attributable to employee contributions in excess of 3% is not eligible for the subtraction. The solution to this problem is to rollover the account to an IRA if the individual is 59 ½ or older or disabled. If the individual does not meet either of those requirements, substantially equal periodic distributions from an IRA made under Section 72(t)(2)(iii)(iv) for five years or attainment of age 59 ½, whichever period is longer, would qualify. See Treasury's Revenue Administrative Bulletin 1988-30, and pages 66 and 67 of Treasury's Taxpayer Assistance Manual. See page 66 for the exception for equal periodic distributions from IRAs.
Larry Larimee, the MACPA representative on the Individual Taxes Advisory Group of the Michigan Department of Treasury contributed to this article.