The IRS on Sept. 28 issued final regulations updating the federal income tax withholding rules for certain periodic retirement and annuity payments made after Dec. 31, 2020. TD 9920 affects payors of certain periodic payments, plan administrators that are required to withhold on such payments, and payees who receive such payments.
The Tax Cuts and Jobs Act (TCJA) amended a rule specifying that if no withholding certificate was in effect for a taxpayer’s periodic payments, the amount to be withheld from the payments was to be determined by treating the taxpayer as a married individual claiming three withholding exemptions. Under the TCJA, the rate of withholding on periodic payments when no withholding certificate is in effect instead is to be determined under rules prescribed by the Secretary of the Treasury.
The IRS had issued notices—Notice 2018-14, Notice 2018-92 and Notice 2020-3, for calendar years 2018, 2019 and 2020, respectively—providing that the default rate of withholding on periodic payments under Code Section 3405(a) is based on treating the payee as a married individual claiming three withholding allowances.
What the Final Regs Do
On May 27, 2020, the Treasury Department and the IRS published a proposed regulation in the Federal Register that proposed updating certain provisions of Treas. Reg. §35.3405-1T to conform to the change the TCJA made to Code Section 3405(a)(4). Specifically, they proposed replacing three Q&As with new Treas. Reg. §31.3405(a)-1.
The IRS in TD 9920 provides guidance for 2021 and future calendar years. It specifies that the Treasury Department and the IRS will provide the rules and procedures for determining the default rate of withholding on periodic payments in applicable forms, instructions, publications and other guidance.
Effect on Form W-4P
In July 2020, the IRS released a draft of a redesigned 2021 Form W-4P and instructions intended to align with the redesigned Form W-4, “Employee’s Withholding Certificate.”
The draft 2021 Form W-4P proposed a new default rate of withholding on periodic payments that begin after Dec. 31, 2020. However, based on comments it received on the draft Form W-4P, the IRS is going to delay issuing the redesigned form.
Instead, the 2021 Form W-4P will be similar to the 2020 Form W-4P. Consequently, the IRS also intends to state in the instructions to the 2021 Form W-4P and related publications that the default rate of withholding on periodic payments will continue to be determined by treating the taxpayer as a married individual claiming three withholding allowances.
The Treasury and IRS plan to continue working closely with the tax community on redesigning the Form W 4P. The IRS says that they intend to make the withholding system more accurate and transparent.
Effective Date
TD 9920 will be effective on the date when it is published in the Federal Register.
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