Interim Guidance on Income Tax Withholding from Retirement and Annuity Distributions

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Interim Guidance on Income Tax Withholding from Retirement and Annuity

Distributions

Notice 2020-3

I.

PURPOSE

This notice provides guidance for the 2020 calendar year regarding withholding

from periodic payments for pensions, annuities, and certain other deferred income

under § 3405(a) of the Internal Revenue Code (Code), including the rules for

withholding from periodic payments under § 3405(a) when no withholding certificate has

been furnished (default rate of withholding). This notice also informs taxpayers that the

Department of the Treasury (Treasury Department) and the Internal Revenue Service

(IRS) are considering whether the 2020 default rate of withholding under § 3405(a) will

continue to be appropriate for calendar years after 2020 and request comments related

to the potential adoption of a new default rate of withholding. The deadline for

submission of comments is February 17, 2020.

II.

BACKGROUND

Section 3405 generally requires the payor of certain payments for pensions,

annuities, and certain other deferred income to withhold amounts from the payments

unless an individual has elected not to have withholding apply.1 An individual’s

withholding election under § 3405 (or election not to have withholding apply, if available)

1 The election not to have withholding apply generally is unavailable with respect to eligible rollover

distributions under § 3405(c) and certain payments to be made outside of the United States or its

possessions under § 3405(e)(13).

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generally is made using Form W-4P, Withholding Certificate for Pension or Annuity

Payments.

Section 3405(a) generally requires the payor of periodic payments from

pensions, annuities, or certain other deferred income to withhold from those payments

as if the payments were wages paid by an employer to an employee, unless an

individual has elected not to have withholding apply

405(e)(13).

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generally is made using Form W-4P, Withholding Certificate for Pension or Annuity

Payments.

Section 3405(a) generally requires the payor of periodic payments from

pensions, annuities, or certain other deferred income to withhold from those payments

as if the payments were wages paid by an employer to an employee, unless an

individual has elected not to have withholding apply. Section 3402 requires an

employer to deduct and withhold income tax from employees’ wages under methods

and procedures prescribed by the Secretary. An employee who receives wages subject

to withholding under § 3402 is required to furnish a withholding allowance certificate to

his or her employer. See § 3402(f)(2), (5); Treas. Reg. § 31.3402(f)(5)-1.

Prior to the 2020 calendar year, information requested on Form W-4P regarding

withholding from periodic payments generally paralleled the information requested on

Form W-4 for withholding from wages.2 The Form W-4 for the 2020 calendar year

(which has been renamed the Form W-4, Employee’s Withholding Certificate) has been

redesigned to increase transparency and accuracy of the withholding system.

Beginning in calendar year 2020, employers are required to use the redesigned form for

all new employees and employees hired prior to 2020 who wish to adjust their

withholding. As a result, information requested on the 2020 Form W-4 no longer

parallels information requested on Form W-4P for withholding from periodic payments.

Among other changes, the redesigned Form W-4 requests the employee’s filing status,

rather than marital status, and no longer requests the number of withholding allowances

2 The no-withholding election that is generally available for periodic payments under § 3405(a) is not

available for wages; therefore, the no-withholding election on Line 1 of the 2019 Form W-4P does not

parallel the conditions to claim exemption from wage withholding on the 2019 Form W-4

er requests the number of withholding allowances

2 The no-withholding election that is generally available for periodic payments under § 3405(a) is not

available for wages; therefore, the no-withholding election on Line 1 of the 2019 Form W-4P does not

parallel the conditions to claim exemption from wage withholding on the 2019 Form W-4.

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the employee is claiming. The 2020 Form W-4 also includes a new method by which an

employee may request withholding using higher withholding rate tables. Importantly,

the Treasury Department and the IRS have designed the withholding tables and

computational procedures in the 2020 Publication 15-T, Federal Income Tax

Withholding Methods, to work with both a 2019 or earlier Form W-4 and the redesigned

2020 Form W-4. Therefore, for purposes of withholding from periodic payments under

§ 3405(a), the IRS plans to provide in the 2020 Publication 15-A, Employer's

Supplemental Tax Guide, that the 2020 Form W-4P will work with certain withholding

tables and computational procedures in the 2020 Publication 15-T that are applicable to

a 2019 or earlier Form W-4.

Section 3405(a)(4) was amended by section 11041(c)(2)(G) of the Tax Cuts and

Jobs Act, Pub. L. 115-97 (TCJA) to provide that the withholding rate for periodic

payments when no withholding certificate has been furnished “shall be determined

under rules prescribed by the Secretary.” Under the law in effect before 2018,

§ 3405(a)(4) provided that, in the case of a payee entitled to periodic payments with

respect to which a withholding certificate had not been furnished, the amount to be

withheld from each such payment “shall be determined by treating the payee as a

married individual claiming 3 withholding exemptions.” Temporary Treasury

Regulations issued under § 3405 (as in effect before 2018) continue to provide that, if

no withholding certificate has been furnished with respect to periodic payments under

§ 3405(a), then the payor must base wi

furnished, the amount to be

withheld from each such payment “shall be determined by treating the payee as a

married individual claiming 3 withholding exemptions.” Temporary Treasury

Regulations issued under § 3405 (as in effect before 2018) continue to provide that, if

no withholding certificate has been furnished with respect to periodic payments under

§ 3405(a), then the payor must base withholding on the rates for a married person

claiming three withholding allowances. See Temp. Treas. Reg. § 35.3405-1T, Q&As A-

10, B-3, B-4.

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Following enactment of TCJA, the Treasury Department and the IRS issued

guidance to address changes made by TCJA to withholding rules under §§ 3401, 3402,

and 3405. See Notice 2018-14, 2018-7 I.R.B. 353, and Notice 2018-92, 2018-51 I.R.B.

1038. With respect to § 3405(a), section V of Notice 2018-14 provided that, for 2018,

the default rate of withholding would parallel the rules for prior years and would be

based on treating the payee as a married individual claiming three withholding

allowances. Similarly, section 10 of Notice 2018-92 provided that, for 2019, the default

rate of withholding under § 3405(a)(4) would parallel the rules for prior years, and would

be based on treating the payee as a married individual claiming three withholding

allowances.

III.

2020 FORM W-4P AND RELATED TABLES AND COMPUTATIONAL

PROCEDURES FOR WITHHOLDING UNDER SECTION 3405(a)

The information requested on the 2020 Form W-4P for periodic payments (other

than the no-withholding election on Line 1) generally will continue to parallel the

information requested on Form W-4 prior to 2020. Payees of periodic payments may

use either the worksheets to Form W-4P or the Tax Withholding Estimator

(www.irs.gov/W4App) to assist in determining their entries on the 2020 Form W-4P

The information requested on the 2020 Form W-4P for periodic payments (other

than the no-withholding election on Line 1) generally will continue to parallel the

information requested on Form W-4 prior to 2020. Payees of periodic payments may

use either the worksheets to Form W-4P or the Tax Withholding Estimator

(www.irs.gov/W4App) to assist in determining their entries on the 2020 Form W-4P. As

explained in Section II of this notice, certain withholding tables and computational

procedures in the 2020 Publication 15-T that are applicable to a 2019 or earlier Form

W-4 will also work with the 2020 Form W-4P.

IV.

RULES FOR 2020 FOR WITHHOLDING FROM PERIODIC PAYMENTS

UNDER SECTION 3405(a) WHEN NO WITHHOLDING CERTIFICATE HAS BEEN

FURNISHED

For the 2020 calendar year, the rules for withholding from periodic payments

under § 3405(a) when no withholding certificate has been furnished will continue to

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parallel the rules for prior years. Therefore, for 2020, the default rate of withholding

from periodic payments under § 3405(a) will be based on treating the payee as a

married individual claiming three withholding allowances and applying that status to the

applicable withholding tables and related computational procedures in the 2020

Publication 15-T. The IRS plans to provide in the 2020 Publication 15-A that this default

rate of withholding will work with certain withholding tables and computational

procedures in the 2020 Publication 15-T that are applicable to a 2019 or earlier

Form W-4.

V.

WITHHOLDING UNDER SECTION 3405(a) FOR YEARS AFTER 2020

The Treasury Department and the IRS will provide the rules and procedures that

apply for calendar years after 2020 for withholding from periodic payments under

§ 3405(a) in applicable forms, instructions, publications, and other guidance

tional

procedures in the 2020 Publication 15-T that are applicable to a 2019 or earlier

Form W-4.

V.

WITHHOLDING UNDER SECTION 3405(a) FOR YEARS AFTER 2020

The Treasury Department and the IRS will provide the rules and procedures that

apply for calendar years after 2020 for withholding from periodic payments under

§ 3405(a) in applicable forms, instructions, publications, and other guidance. In

addition, the Treasury Department and the IRS are considering whether the default rate

of withholding from periodic payments under § 3405(a) described in section IV of this

notice will continue to be appropriate for calendar years after 2020.

VI.

REQUEST FOR COMMENTS

The Treasury Department and the IRS invite comments on whether the adoption

of a new default rate of withholding from periodic payments under § 3405(a) that would

apply prospectively (that is, would only apply to periodic payments that begin after the

effective date of the new default withholding rate) would present any administrative

challenges.

Comments should be submitted in writing on or before February 17, 2020.

Comments should include a reference to Notice 2020-3. Comments may be submitted

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electronically via the Federal eRulemaking Portal at www.regulations.gov (type IRS-

2019-0051 in the search field on the regulations.gov homepage to find this notice and

submit comments). Alternatively, comments may be mailed to: CC:PA:LPD:PR (Notice

2020-3), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,

Washington, DC 20044. All comments will be available for public inspection and

copying in their entirety.

VII.

PAPERWORK REDUCTION ACT

Any collection of information associated with this notice has been submitted to

the Office of Management and Budget for review under OMB control number 1545-0074

in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). In

general, the collection of information is required under § 3405(a)

le for public inspection and

copying in their entirety.

VII.

PAPERWORK REDUCTION ACT

Any collection of information associated with this notice has been submitted to

the Office of Management and Budget for review under OMB control number 1545-0074

in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). In

general, the collection of information is required under § 3405(a). An agency may not

conduct or sponsor and a person is not required to respond to a collection of information

unless it displays a valid OMB control number.

VIII.

DRAFTING INFORMATION

The principal author of this notice is Kara M. Soderstrom of the Office of the

Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment

Taxes). However, other personnel from the Treasury Department and the IRS

participated in the development of this guidance. For further information regarding this

notice, contact Ms. Soderstrom at 202-317-6799 (not a toll-free number).