Reminder: 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). As the 2018 changes to the tax law may have affected individual income tax rates for retirees and beneficiaries, this notice is particularly important.

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 (2018), 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. See our previous e-alert indicating that the IRS issued proposed regulations on withholding for periodic and non-periodic payments at https://www.icemiller.com/ice-on-fire-insights/publications/irs-issues-proposed-regulations-on-withholding-for/.   

With the 2018 changes to tax rates and the brackets of taxable income to which the rates apply, it is important for individuals to consider whether they want to change their withholding in order to align their withholding with the current tax brackets. The Internal Revenue Service ("IRS") will no longer issue Notice 1036 for tax year 2018 and later. Instead, this information now is available at the IRS.gov webpages relating to Publication 15, (Circular E), Employer's Tax Guide (see https://www.irs.gov/forms-pubs/about-publication-15) and Publication 15-T, Federal Income Tax Withholding Methods (see https://www.irs.gov/forms-pubs/about-publication-15-t) and in future drafts of these publications. Visit: https://www.irs.gov/forms-pubs/2020-percentage-method-tables-for-automated-payroll-systems for the early release copies of Percentage Method Tables for Automated Payroll Systems that will be in Publication 15-T (for use in 2020). While these are the tables for Form W-4 (which has been updated to align with the 2018 tax law changes), consider our previous e-alert in which we state that Form W-4P has not yet been changed in the same manner as Form W-4: "No Changes Yet to Form W-4P" at https://www.icemiller.com/ice-on-fire-insights/publications/no-changes-yet-to-form-w-4p/. On November 4, 2019, the IRS issued a draft of Publication 15-T, which confirms that retirement systems may continue to rely on pre-2020 Form W-4P and current system programming. Visit https://www.irs.gov/pub/irs-dft/p15t--dft.pdf. Additional tax law changes, including the increased standard deduction and the increased child/family tax credit, also may impact individual decisions on withholding. To assist taxpayers, the IRS released the updated Tax Withholding Estimator for use by taxpayers in estimating the appropriate withholding for federal income taxes in 2019. The Tax Withholding Estimator is available at https://www.irs.gov/individuals/tax-withholding-estimator.    

For more information, contact Audra Ferguson-Allen, Rob Gauss, Lisa Harrison, Lindsay Knowles, Tara Sciscoe, Chris Sears, or the Ice Miller Employee Benefits attorney with whom you 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.