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IRS Issues Proposed Regulations on Withholding for Periodic and Non-Periodic Payments

The Internal Revenue Service ("IRS") recently issued proposed regulations regarding withholding for periodic and non-periodic payments. Through a series of questions and answers, the proposed regulations expand upon previous guidance to address withholding in certain circumstances.

Internal Revenue Code ("Code") § 3405 establishes general withholding rules for pensions, annuities, and deferred income. Code § 3405 provides separate withholding rules for periodic and non-periodic payments, as well as eligible rollover distributions. For a brief review of the withholding rules and examples, please click here.

Notice 87-7

Following the Tax Reform Act of 1986, the IRS issued Notice 87-7 to elaborate on withholding rules in certain circumstances. According to Notice 87-7:

Payees with addresses outside of the United States. If a payee has provided the payor with a residence address outside of the United States, the payor is required to withhold from distributions made to the payee after December 31, 1986. Rules on determining amounts to be withheld are set forth in Code §§ 3405(a) and (b).
Payees with addresses within the United States. If a payee has provided the payor with a residence address within the United States, the payor is required to withhold from distributions made to the payee unless the payee has elected no withholding in accordance with the applicable provisions of Code § 3405.
Payees who have not provided an address. If a payee has not provided the payor with a residence address, the payor is required to withhold from distributions made to the payee after December 31, 1986. Included within this category is a payee who has provided the payor with an address for the payee's nominee, trustee, or agent without also providing the payee's residence address.

2019 Proposed Regulations

The proposed regulations clarify the withholding rules set forth in Notice 87-7 for the following circumstances:

Payees who provide the payor with a military or diplomatic post office address. The proposed regulations clarify that Army Post Office, Fleet Post Office, or Diplomatic Post Office addresses are considered addresses located within the United States for purposes of Code § 3405(e)(13)(A). This enables payees to make elections for periodic distributions and for non-periodic distributions. See Prop. Reg. § 31.3405(e)-1(b).
Payees who provide the payor with a residence address within the United States but request the payment be delivered to a person or financial institution outside the United States. If a payee provides the payor with a residence address within the United States but also requests that the distribution be sent to a financial institution or person outside of the United States, then the payee may not opt out of withholding (and any such election would be invalid). See Prop. Reg. § 31.3405(e)-1(c).
Payees with a residence address located outside of the United States and payees who have not provided a residence address. For these payees, the payor is required to withhold income tax under Code § 3405 from any distribution (and any withholding elections would be invalid). See Prop. Reg. §§ 31.3405(e)-1(d) and (e). Importantly, a payee who has provided an address for the payee's nominee, trustee, or agent without also providing the payee's residence address has not provided a residence address for purposes of this regulation. See Prop. Reg. §§ 31.3405(e)-1(e).
Payments to Nonresident Aliens under Code § 1441. As established in Code § 3405(e)(1)(B)(iii), the withholding rules under section 3405(a) and (b) do not apply to distributions to nonresident aliens, which are subject to the withholding rules under Code § 1441. See Prop. Reg. §§ 31.3405(e)-1(f).

Once final regulations are published, the regulations will supersede Notice 87-7. Taxpayers may continue to rely upon Notice 87-7 until the proposed regulations are finalized. Alternatively, taxpayers may rely upon Prop. Reg. § 31.3405(e)-1(b)(1) and (2) of the Proposed Regulations until the applicability date of the Final Regulations. We will continue to monitor the development of these Regulations.

For more information about how the new proposed withholding regulations might affect your employee benefits plans, please contact Amy Dygert, Audra Ferguson-Allen, Robert Gauss, Lisa Harrison, Lindsay Knowles, Tara Sciscoe, Chris Sears, or the Ice Miller LLP Employee Benefits attorney with whom you most closely work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.