IRS Issues Proposed Reg on Withholding on Certain Periodic Retirement and Annuity Payments

The IRS has issued proposed regulations that provide rules for federal income tax withholding on certain periodic retirement and annuity payments. The proposed regs would implement changes Section 11041(c)(2)(G) of the Tax Cuts and Jobs Act (TCJA) made to Internal Revenue Code Section 3405(a)(4) and the Employment Tax Regulations under Section 3405.

This proposed regulation would affect payors of certain periodic payments, plan administrators that are required to withhold on such payments and payees who receive such payments. 

 

Before the TCJA was enacted, if no withholding certificate was in effect for a taxpayer’s periodic payments, the amount to be withheld from the payments was determined by treating the taxpayer as a married individual claiming three withholding exemptions. The TCJA amended this rule to provide that the rate of withholding on periodic payments when no withholding certificate is in effect would instead be determined under rules prescribed by the Secretary of the Treasury.

 

 

The proposed regulation would remove from IRS Employment Tax Regulation Section 35.3405-1T Q&As a-10, b-3 and b-4, which each provide that the default rate of withholding on periodic payments is determined by treating the payee as married and claiming three withholding allowances. It would do so because they prescribe the substantive default rate of withholding rule under Code Section 3405(a)(4) prior to their amendment by the TCJA. 

 

The proposed regulation would not remove other Q&As in IRS Employment Tax Regulation Section 35.3405-1T that reference the pre-TCJA rule under Section 3405(a)(4) but do not require payors to withhold based upon that pre-TCJA rule. 

 

The proposed regulation would update and replace the provisions of Q&As a-10, b-3 and b-4 in new IRS Employment Tax Regulation Section 31.3405(a)-1, which provides that the default rate of withholding on periodic payments is determined in the manner described in the applicable forms, instructions,  publications and other guidance prescribed by the Commissioner.  

 

The IRS says that proposed IRS Employment Tax Regulation Section 31.3405(a)-1 provides a flexible and administrable rule that leaves the communication and mechanical details of the default rate of withholding on periodic payments to be provided in applicable forms, instructions, publications and other guidance. These materials, the IRS says, can be updated quickly as needed to provide payors and plan administrators that process payments adequate time to program their systems to withhold the proper amount of income tax. 

 

The IRS adds that proposed IRS Employment Tax Regulation Section 31.3405(a)-1 would also generally update Q&As a-10, b-3, and b-4 of IRS Employment Tax Regulation Section 35.3405-1T to reflect relevant statutory changes and provide clarifications. Notably, the proposed regulation says, in accordance with Code Section 3405(a)(3), proposed IRS Employment Tax Regulation Section 31.3405(a)-1 would update the rules for determining the effective date of a payee’s Form W-4P by referencing the rules under Code Section 3402(f)(3) and the applicable forms, instructions, publications and other guidance prescribed by the Commissioner.

 

 

The IRS is accepting public comments and requests for a public hearing on the proposed regulations.

 

Written or electronic comments and requests for a public hearing must be received by 60 days after the proposed regulations are published in the Federal Register.

 

The IRS strongly encourages electronic submission of comments, which are to be submitted through the Federal eRulemaking Portal at http://www.regulations.gov (indicate IRS and REG–100320-20) by following the online instructions for submitting comments. Paper submissions are to be sent to:

 

CC:PA:LPD:PR (REG–100320-20)
Room 5203
Internal Revenue Service
PO Box 7604
Ben Franklin Station
Washington, D.C. 20044

 

The IRS will schedule a public hearing if any person who timely submits electronic or written comments requests one in writing.

 

 

This regulation is proposed to apply to periodic payments made after Dec. 31, 2020. But the IRS also says that taxpayers may rely on these proposed rules until the date a Treasury Decision adopting this proposed rule as a final regulation is published.