July 23, 2019

July 22, 2019

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To Withhold or Not to Withhold on Pension Distributions: A New Proposed Regulation Clarifies Obligations

On May 31, the IRS issued a proposed regulation — presented in Q & A format — concerning income tax withholding obligations on non-rollover distributions from employer-sponsored plans — including pension, annuity, profit sharing, stock bonus and any other deferred compensation plan — to destinations outside the U.S. Unlike U.S. payees, non-U.S. payees cannot elect to forego income tax withholding on such distributions.

Current Guidance

Notice 87-7 provides current guidance concerning withholding obligations on non-rollover distributions. The Notice provides:

• If the payee provides the payor with a residential address outside the U.S., the payor is required to withhold.

• If the payee provides the payor with a residential address within the U.S., the payor is required to withhold unless the payee has elected no withholding.

• If the payee does not provide any residential address, the payor is required to withhold.

Proposed Regulation

The proposed regulation is based on, and provides clarification concerning, the guidance provided in Notice 87-7. The proposed regulation provides:

• Withholding obligations apply and cannot be waived where the payee provides a U.S. residential address but provides payment instructions indicating the funds are to be delivered outside of the U.S.

• Withholding obligations apply and cannot be waived where the payee provides a non-U.S. residential address, without regard to the delivery instructions — including an instruction to deliver the distribution to a financial institution located in the U.S.

This clarification is an acknowledgement of the ease with which funds deposited in a U.S. financial institution can be withdrawn by a person located outside the U.S. and of the fact that a payee’s residential address is most likely the location of ultimate distribution.

• Withholding obligations apply and cannot be waived where the payee has not provided a residential address.

• Withholding obligations apply and can be waived where the payee provides a military or diplomatic post office address.

Proposed Applicability Date

The new withholding rules will apply to distributions that occur after the proposed regulation is finalized, at which point it will supersede Notice 87-7. Until then, payors can continue to rely on Notice 87-7 as well as the proposed regulation’s rule concerning military and diplomatic post office addresses.

Jackson Lewis P.C. © 2019

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About this Author

Stephanie O. Zorn, Jackson Lewis Law Firm, Employee Benefits Attorney
Of Counsel

Ms. Zorn  has over twenty years of experience exclusively representing management in employee benefits and employment matters, both as in-house counsel and in private practice.

Ms. Zorn’s  employee benefits practice includes counseling clients with regard to plan compliance, administration, participant disclosures, reporting and drafting requirements under ERISA, the Internal Revenue Code, ACA, HIPAA and COBRA. Ms. Zorn assists clients with a broad range of plans, including retirement plans, welfare benefit plans,...

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