Annual Tax Withholding Notice
Annually, retirement plans are required to provide benefit recipients an opportunity to update their federal income tax withholding for benefit payments that are not eligible rollover distributions (this is known as the TEFRA notice).
For periodic and non-periodic payments, the recipient of an employer pension or annuity benefit is entitled to choose not to have income tax withheld from retirement plan payments (so long as the payments are not eligible rollover distributions). For a detailed discussion of federal withholding tax, visit Publication 575 Pension and Annuity Income (2020), pp. 9-10. The withholding election remains in effect until the recipient changes or revokes the withholding election in place.
For periodic payments, unless the recipient chooses no withholding, the annuity or similar periodic payment will be treated like wages for withholding purposes. Therefore, if the payee does not provide a completed withholding certificate (Form W-4P or a similar form provided by the payer), or if the payee provides an invalid withholding certificate, federal tax will be withheld as if the payee is married and claiming three withholding allowances. Note: A recipient of a periodic payment may not elect flat tax withholding unless the recipient claims zero or more exemptions. Our previous publication discussed IRS Final Regulations that provide guidance for 2021 and future calendar years on withholding from periodic payments. See, IRS Issues Final Regulations on Income Tax Withholding on Certain Periodic Retirement and Annuity Payments made After December 31, 2020. These Final Regulations specify that, for determining the default rate of withholding on periodic payments, the Treasury and the IRS will provide the rules and procedures in applicable forms, instructions, publications and other guidance (e.g. Publication 15-T and Form W-4P Instructions). The 2021 Form W-4P Instructions provide that the default rate of withholding on period payments is determined by treating the payee as a married individual claiming three withholding allowances.
Thus, retirement plans should notify benefit recipients of the
opportunity to change their withholding elections. As provided in
Section 8 of Publication 15-A, Employer's Supplemental Tax
Guide (Supplement to Pub. 15, Employer's Tax
Guide), see section 5 of Publication 15-T, Federal Income Tax
Withholding Methods, for the appropriate computational method
to figure federal income tax withholding on periodic payments. To
assist taxpayers, the IRS provides a Tax Withholding Estimator for
use by taxpayers in estimating the appropriate withholding for
federal income taxes. The Tax Withholding Estimator is available
at https://www.irs.gov/individuals/tax-withholding-estimator.
Draft IRS Withholding Form W-4R
The IRS has issued an early release draft of a new form, the 2022 IRS Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, which the IRS is providing for information, review, and feedback from the public. The 2022 Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, has been split into two forms, Form W-4P for periodic pensions and annuities, and the new Form W-4R for nonperiodic payments and eligible rollover distributions. This draft form is available at https://www.irs.gov/pub/irs-dft/fw4r--dft.pdf. A 2022 draft Form W-4P will be posted separately.
The IRS has indicated that it is likely the draft Form W-4R will change prior to being finalized, and the IRS is soliciting comments on the draft form, which may be submitted at www.IRS.gov/FormComments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
