Mandatory Withholding on Annuities and Pensions for Financial Institutions Operating in Minnesota

Effective January 1, 2022, financial institutions operating in Minnesota are required to begin withholding Minnesota Personal Income Tax (“Tax”) on annuity and pension payments made to any of its customers that reside in Minnesota.¹  After recent developments in remote work, financial institutions should review their operations in Minnesota to determine whether they are required to withhold and remit Tax to Minnesota on these distributions if it has or is determined to have “nexus” in Minnesota, which can be created by an employee residing and working remotely within Minnesota.

If a financial institution has nexus in Minnesota but has not withheld Tax on pension and annuity distributions after January 1, 2022, it could be liable for up to the full amount of the Tax that should have been withheld, together with a penalty for failure to timely withhold and remit Tax.²

To satisfy these new withholding requirements for annuity and pension payments, financial institutions with nexus in Minnesota,  must register with the Minnesota Department of Revenue, obtain a Minnesota Tax ID number, and open an active withholding Tax account with the state.³ Before issuing a distribution, or any further distributions if distributions have already been made, a financial institution must have the recipient complete and return Form W-4MNP.⁴ At the end of the year, the bank must report withholding on the federal Form 1099-R and send the form to the Minnesota Department of Revenue.⁵

Financial institutions that have failed to withhold or remit Tax should be aware they may qualify for the Minnesota Voluntary Disclosure Program to assist with unreported pension and annuity withholding Tax and to mitigate any penalties that may be imposed.⁶ A financial institution operating in Minnesota may qualify as long as it has not been contacted or audited by the Minnesota Department of Revenue.⁷

If you have any questions about the implementation of this Minnesota Tax  withholding requirement, please contact one of the authors of this alert.  We have experience in Tax reporting by financial institutions, including Tax disputes and penalty resolution arising from managing the implementation of new reporting requirements.
 

¹ Minn. Stat. § 290.92(20).

² Minn. Stat. § 289A.31(5); Minn. R. 8092.1100.

³ Minn. Dep’t Revenue, Withholding for Annuities and Pensions, (February 1, 2022), https://www.revenue.state.mn.us/withholding-annuities-and-pensions.

⁴ 2022 W-4MNP, Minnesota Withholding Certificate for Pension or Annuity Payments

⁵ 2022 Minnesota Income Tax Withholding Guide (February 1, 2022).

⁶  Minn. Dep’t Revenue, Minnesota Voluntary Disclosure Program, (May 28, 2019), https://www.revenue.state.mn.us/minnesota-voluntary-disclosure-program.

⁷ Id.