Meet Your IRA Withholding Notice Requirements (Without Losing Your Mind)
By Jodie Norquist, CIP, CHSP
Did you meet your IRA withholding notice requirements for those clients who take scheduled distributions, such as required minimum distributions (RMDs), in the first half of the year? Excellent. Don’t forget about the second round of mailings due in June for clients who take distributions during the second half of 2022.
Some days, the responsibilities of maintaining IRA compliance can feel like a heavy lift. But it’s especially important to stay on top of withholding notice requirements. Withholding remains a key area of IRA compliance, and the costs associated with failing to timely provide withholding notices to clients can be steep. The $10 per penalty for failing to timely provide withholding notices to clients jumped to $100 per failure, effective after December 31, 2019. This penalty, when applied to many IRAs and multiple failures, could easily escalate to $50,000—the maximum annual amount that the IRS will penalize financial organizations for these failures.
Satisfying Withholding Notice Requirements Can Be Tricky
Financial organizations must notify their clients who take scheduled distributions of their right to make, renew, or revoke their withholding elections. This notification must take place at different times during the year for your clients, depending on when they tend to take their RMDs. If they take no action after receiving this notice, their withholding election on record, by default, remains in effect. For distributions taken less frequently than quarterly, your clients must receive a withholding notice before each distribution, but no more than six months before the first payment each year. Financial organizations tend to send semi-annual notices, usually by January and in June. By mailing semi-annual notices, all the distribution frequencies are covered.
Financial organizations should also establish a master file documenting each withholding notice mailing. The file should contain a dated copy of the notice and a list (paper or electronic) of the IRA owners who received the notice.
A New Withholding Form May Make Compliance Even Trickier
The IRS released a new withholding form in January 2022: Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions. The IRS also issued a revised 2022 Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments. Although the IRS is not requiring financial organizations to use the new and revised forms until January 1, 2023, financial organizations may start using them in 2022.
The new 2022 Form W-4P will be used for periodic distributions (i.e., annuity or similar periodic distributions); Form W-4R will capture nonperiodic distributions (i.e., on-demand distributions) and eligible rollover distributions.
Because the new 2022 Form W-4R allows those receiving nonperiodic distributions to elect a withholding rate of less than 10 percent, clients may wish to use the new form this year. This is a change from Form W-4P, which has historically allowed only a withholding rate of 10 percent or higher. If your financial organization is using the 2021 Form W-4P, the default withholding rate for periodic distributions is “married claiming three withholding allowances.” The default withholding rate on the 2022 Form W-4P is “single with no adjustments.”
Overwhelmed? Let Us Help
If you’re unsure whether your withholding notice obligations are being met or if your IRA department is short-staffed, Ascensus’ IRA Withholding Notice Mailing Service can help. Ascensus will mail an IRA Withholding Notice and Election form twice per year to your IRA owners and beneficiaries who are receiving scheduled annual payments. This is a simple, stress-free way to eliminate errors and the risk of noncompliance.
Ascensus is now accepting subscribers for the June 2022 mailing. Let us take this IRA reporting obligation off your plate. We can help you navigate all IRA withholding rule changes, including form updates.
Contact customersupport@ascensus.com to learn more about this mailing service.
If your organization is a Fully-Administered Program client, call 800-356-9140, or select “IRA Withholding Notice Mailing” from the Maintenance Tools section on the IRAdirect® homepage to enroll.
