Pension & Benefits News IRS final regs address tax default withholding rate for certain periodic retirement payments
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Monday, October 26, 2020

IRS final regs address tax default withholding rate for certain periodic retirement payments

By Pension and Benefits Editorial Staff

The IRS has issued final regulations addressing tax withholding on certain periodic retirement and annuity payments under Code Sec. 3405(a), to implement amendments made by the Tax Cuts and Jobs Act (P.L. 115-97, TCJA). The regulations affect payors of certain periodic payments, plan administrators that are required to withhold on such payments, and payees who receive such payments. The final regulations adopt, without modification, proposed regulations that updated and replaced the provisions of three questions and answers with a new regulation regarding the default withholding rate on periodic payments made after December 31, 2020.

Withholding on periodic payments. Under Code Sec. 3405, income tax withholding is required for taxable payments from an employer-sponsored pension, annuity, profit-sharing, stock bonus, or other deferred compensation plan, unless the payee elects not to have tax withheld. With certain exceptions, withholding on annuity and similar periodic payments is treated like withholding on wages paid to an employee.

Before the TCJA, if a withholding certificate (Form W-4P) was not in effect for a periodic payment, the default withholding rate on the payment was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended Code Sec. 3405(a)(4) so that the default withholding rate on such a periodic payment is instead determined under rules prescribed by the Treasury Secretary.

After the TCJA was enacted, the IRS issued three notices providing that, for calendar years 2018, 2019, and 2020, the default withholding rate on periodic payments under Code Sec. 3405(a)(4) is based on treating the payee as a married individual claiming three withholding allowances (IRS Notice 2020-3); IRS Notice 2018-92; and IRS Notice 2018-14.

Under new IRS Reg. §31.3405(a)-1, the default rate of withholding on periodic payments made after December 31, 2020 is determined in the manner described in the applicable forms, instructions, publications, and other guidance prescribed by the IRS.

Effective and applicability date. The regulation is effective October 1, 2020 and applies to periodic payments made after December 31, 2020.

85 FR 61813.

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