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Retirement News for Employers - Summer 2011 - We're Glad You Asked!

Should our plan administrator withhold 20% for federal income tax from all retirement plan distributions?

No. The plan administrator should only withhold 20% for federal income tax from eligible rollover distributions. A plan administrator doesn’t have to apply withholding if expected distributions to an individual are less than $200 for the year. The 20% withholding generally only applies to any previously untaxed amount of the eligible rollover distribution (not to any already taxed amount - cost). However, no withholding is required if the plan directly rolls over (in a trustee-to-trustee transfer) the amount to another qualified retirement plan or IRA.

Distributions that are not eligible rollover distributions are subject to different withholding rates depending on whether they are periodic or nonperiodic payments.

  • Periodic payments are made at regular intervals for more than 1 year (for example, an annuity).
    • Generally, the plan administrator must withhold at the rate for a married individual with 3 withholding exemptions. However, the plan administrator must notify the recipient of his or her right to:
      • elect no withholding or elect to have a different amount withheld, by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments, with the plan administrator; and
      • revoke the election at any time.
    • The plan administrator must withhold 10% from any required minimum distributions and 20% from any excess amount distributed that is an eligible rollover distribution.

  • Nonperiodic payments are distributions that usually aren’t made at regular intervals and are not eligible rollover distributions, for example:
    • distributions of excess annual additions;
    • distributions of excess contributions and excess aggregate contributions from most plans if made within 2 ½ months after the end of the plan year;
    • hardship distributions; and
    • loans treated as distributions.

The plan administrator must withhold 10% from nonperiodic payments. However, the recipient may elect no withholding or have a different amount withheld by filing a Form W-4P with the plan administrator.

Special Situations

  • Distributions made because of recognized disasters.
  • Special withholding rules apply to certain noncash distributions, including:
    • employer securities; and
    • a participant’s accrued benefit offset because of a defaulted loan. (see Treas. Reg. §31-3405(c)-1).
  • Distributions delivered outside the U.S. or U.S. possessions.
  • Distributions from designated Roth accounts in 401(k), 403(b) or 457(b) plans:

Penalties

A plan administrator may be subject to penalties for failing to:

  • properly withhold, deposit or report taxes; and
  • electronically deposit withheld taxes. (see for example, Code §§ 6656 and 6672, 6721, 6722 and Treas. Reg. §31.6302-1(h))

Additional Resources

Page Last Reviewed or Updated: 13-Mar-2014