Policy Concerning Non-Qualified Plan Retirement for Resident Taxpayers
Established April 2023
Since these pension plans are non-qualified and reported on a taxpayer’s W-2 rather than a 1099R, they are considered taxable under the Income Tax Ordinance. The issue concerning East Lansing is since the City’s income tax only became effective in January 2019, is it reasonable to tax the full amount of non-qualified plan retirement since it was earned over the taxpayer’s entire career. This is not addressed in the Uniform Income Tax Ordinance since defined contribution plans did not exist in 1964.
After extensive discussion with other Cities, it was recommended that the City of East Lansing establish a policy on how this will be taxed. The only similar language in the Ordinance is the taxation of the long-term capital gains earned prior to the establishment of the income tax. Under this language, only the portion of the gain earned while the income tax was in effect (earned since 1/1/19) is taxable.
The City has decided that these non-qualified plans reported on W-2s will be taxed in a similar manner. Only the portion earned since the income tax has been in effect will be taxed. If the employee worked 30 years and retired in 2022, 4/30ths will be taxed. If the taxpayer retired prior to the establishment of the income tax (1/1/19), none of the distribution will be taxed.