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Withholding on Corrective Distributions


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Hey Y'all!

Quick question for my fellow practitioners.

I am studying the DC-2 book to eventually get my QKA and I came across a sentence saying that corrective distributions (ADP & ACP corrections) are subject to 10% withholding unless the participant completes a Form W-4P. 

I was wondering who all was practicing this? I don't recall ever seeing a corrective distribution with any withholding applied in my short tenure.  

Thanks in advance!!

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I do.  But, I wouldn't let it stop me from issuing the distribution if I'm up against the deadline.  Everything that is legal is not necessarily administratively feasible.  It's important to actually know the withholding rules outlined in IRC Section 3405 and how they apply.  In this case, it's a non-periodic distribution that is not eligible for rollover.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Recognize that the 10% withholding is not a "mandatory withholding" like the 20%  that regularly applies to normal distributions that are eligible to be rolled over but aren't.  The 10% is a voluntary withholding in that it can be waived.  We always provide the W-4P and ask clients to have the participant sign if if they don't want withholding and many do not want withholding.  There is a caveat they get reminding them it is still going to be reported and subject to taxation and they might be underwithheld and subject to a penalty so they might want to consult with their tax advisor.  After that, they are on their own.

Having said that, in 40 years or so, I have NEVER seen any enforcement on the need for a W-4P to avoid the voluntary withholding.  As long as it is reported on the 1099R. the IRS will collect its taxes (and possibly penalties for underwithholding).

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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