Navigating the New Federal Withholding Requirements
By Mary Hopkins, CISP, CIP
I have heard the federal withholding notice has changed. Which form should we be using?
In 2022 the IRS introduced Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions. Withholding elections for nonperiodic distributions are now made on the new IRS Form W-4R. Nonperiodic payments are distributions from IRAs that are considered “payable on demand,” including scheduled automatic distributions, which can be changed at any time by the individual.
The IRS also issued a revised Form W-4P, Withholding Certificate for Pension or Annuity Payments. This form is used to capture withholding elections for periodic distributions (i.e., annuitized payments). Although use of the new forms was optional in 2022, financial organizations had to start complying with the 2023 Form W-4R by January 15, 2023, and with the 2023 Form W-4P by January 18, 2023.
What has changed on Form W-4R?
Form W-4R allows individuals to withhold at any rate between 0 and 100 percent as long as it is a whole percentage, which means no decimals or additional flat dollar amount. Previously, individuals could waive withholding, or withhold between 10 and 100 percent. Also, instead of marking a box to waive withholding, an individual must now elect 0 percent withholding.
What do we do if an individual has not completed Form W-4R?
Financial organizations can rely on the individual’s previous withholding election, including an election made on the 2022 Form W-4P, for all future distributions from the IRA. If no withholding election has been made by the individual, the default federal withholding rate is 10 percent.
Do we need to notify individuals that have scheduled automatic distributions?
Financial organizations are required to provide individuals with a notice of their right to change federal withholding for future distributions. If an individual has scheduled distributions quarterly or more frequently, they must receive a withholding notice each year within a reasonable time before their first distribution. If an individual has scheduled distributions less frequently, such as semi-annual or annual distributions, they must receive a withholding notice not more than six months before their distribution.
