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IRS Issues Guidance on Withholding From Periodic Pension Payments



Notice 2020-3 (Dec. 18, 2019)

Available at

The IRS has announced that Form W-4P (Withholding Certificate for Pension or Annuity Payments), and the rules for federal income tax withholding on periodic payments from pensions (including 401(k) plans), annuities, and certain other deferred income, will be largely unchanged for 2020, despite issuance of a newly redesigned Form W-4 (Employee’s Withholding Certificate) for 2020. Historically, the information requests on Form W-4P have resembled those on Form W-4. Both asked for an employee’s marital status and a number of claimed withholding allowances, and provided worksheets for calculating those allowances. But the redesigned Form W-4 requests an employee’s filing status rather than marital status, and it no longer asks for the number of withholding allowances claimed. Instead, the 2020 Form W-4 offers a method for employees to reflect a second job, a dependent deduction calculation, and an opportunity to indicate annual income or deduction amounts that would affect withholding.

According to Notice 2020-3, Form W-4P for 2020 will include information requests similar to those in the pre-2020 versions of Form W-4; it will not be changed to resemble the redesigned Form W-4. Payees will be able to use worksheets on Form W-4P or an estimator on the IRS website to determine their withholding allowances. Certain withholding tables and computational procedures in the 2020 version of Publication 15-T (Federal Income Tax Withholding Methods) that apply to 2019 or earlier versions of Form W-4 can then be used to calculate withholding based on the 2020 Form W-4P. If no withholding certificate was furnished, the default withholding rate on periodic payments will continue to be determined by treating the payee as a married individual claiming three withholding allowances. The IRS is considering changes for future years, however, and has asked for comments on whether adoption of a new default rate would present administrative challenges if it applied only to periodic payments commencing after the effective date of the new default. Comments must be submitted on or before February 17, 2020.

EBIA Comment: Federal income tax changes made by the Tax Cuts and Jobs Act (TCJA), including temporary elimination of the personal exemption, substantially altered the tax liability of many taxpayers. Those changes affect withholding on periodic pension payments because such payments are generally taxed as if they were wages paid by an employer to an employee (unless the payee has elected not to have withholding apply). This is the third time since the TCJA that the IRS has decided to leave periodic pension payment withholding essentially unchanged. Now that the IRS has finished revising Form W-4, however, it appears that the IRS is ready to focus on Form W-4P and the default rate for payees who provide no withholding certificate. For more information, see EBIA’s 401(k) Plans manual at Sections XIV.B (“Defining an Eligible Rollover Distribution”) and XIV.J.2 (“Income Tax and Withholding Rules for Plan Distributions Other Than Eligible Rollover Distributions”).

Contributing Editors: EBIA Staff.

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