Regulatory Updates

Default Withholding Rate for Periodic Retirement Plan Distributions

September 29, 2020 - The IRS has issued a pre-publication version of final regulations on the default tax withholding rate to be applied to periodic and annuitized distributions from retirement plans. These final regulations are a response to Internal Revenue Code changes contained in the Tax Cuts and Jobs Act (TCJA), legislation enacted in 2017, and provide guidance for 2021 and future calendar years.

Prior to the change, in the absence of a withholding election, the amount to be withheld on a periodic payment was determined by treating the taxpayer as a married individual who had claimed three withholding exemptions. TCJA amended this provision to eliminate this fixed formula, providing flexibility such that—in the absence of a withholding election—the rate of withholding on periodic payments (the default rate) would instead be determined under rules prescribed by the Secretary of the Treasury.

Comments received after these regulations were issued in proposed form included the suggestion that a 10 percent flat rate of withholding apply rather than the default married-with-three-exemptions formula, but that any change to current rules not apply before 2022.

These final regulations align with TCJA in specifying that rules and accompanying procedures for future years’ periodic distributions will be communicated in applicable IRS forms, instructions, publications, or other guidance. However, they also note that—for 2021—the rate for withholding on period distributions when no election is made will remain unchanged. That is, the rate for 2021 will be applied as if the recipient is married and has claimed three exemptions.

Regulatory Updates

IRS Revises Rollover Self-Certification Rules

The IRS has issued modified guidance for taxpayers to self-certify their eligibility for an extension of the 60-day deadline to complete an otherwise-eligible rollover.