Form W-4R for distributions under $200

[Lauren3333]

Under what circumstances are practitioners having participants complete Form W-4R for lump sum distributions of balances under $200.  Prior to 2023, based on the wording in the Special Tax Notice, the plans we administer did not withhold on lump sum distributions under $200.  If the participant wanted federal income tax withheld, they would need to elect the withholding percentage on the distribution form.  Is 20% withholding (or more) now the only option?   Does Form W-4R not have to be provided because the plan is not required to withhold- even though it is an eligible rollover distribution, just not one that a direct rollover option is provided.

[ratherbereading]

We cash out anyone with $200 or less. Our fees eat up 75% of the distribution anyways.  

[bito'money]

You don't have to provide the W-4R (but note that the $200 threshold is based on the total of all distributions during the same year).

See IRS regulation section 35.3405-1T, F-6 and F-7 (which exempts distributions under $200 from the requirements to provide a withholding notice and election), 31.3405(c)-1, A-14 (which exempts distributions under $200 from mandatory withholding) and 1.401(a)(31)-1, A-11 (which exempts the plan from offering a rollover election on distributions reasonably expected to total less than $200). 

[Paul I]

in Safe Harbor Explanations – Eligible Rollover Distributions IRS Notice 2020-62, the IRS published 2 sample rollover notices - one for distributions not from a designated Roth account, and the other from a designated Roth account.  This was before the Form W4-R was released, although I am not aware of any update to the Notice.  Both sample rollover notices include this language:

For payment not from a Roth account

"If your payments for the year are less than $200 (not including payments from a designated Roth account in the Plan), the Plan is not required to allow you to do a direct rollover and is not required to withhold federal income taxes. However, you may do a 60-day rollover."

For payment only from a Roth account

"If your payments for the year (only including payments from the designated Roth account in the Plan) are less than $200, the Plan is not required to allow you to do a direct rollover and is not required to withhold federal income taxes.  However, you can do a 60-day rollover."

The key phrase is "the Plan is not required to allow you do a direct rollover".  Unless there has been a more recent comment from the IRS, you need to see if the plan requires a cash out of small amounts less than $200.  If yes, then based on the above I would say no Form W4-R is required.  If the plan is silent on the $200 cash-out or explicitly says these amounts are available for rollover, then you would treat them the same as an eligible rollover distribution.

[Lauren3333]

Thanks for your comments.  If the key phrase is "the Plan is not required to allow you to do a direct rollover" does that mean that plans that provide for an automatic IRA rollover for non-responding participants who have balances over the distribution fee provide for a direct rollover?  Ex:  participant's account balance is $175, distribution fee is $30. The participant is informed in writing that if they don't return the distribution form their account balance will be rolled over to an IRA at X institution.   However, if a participant returns the distribution form, they can do a 60-day rollover but not a direct rollover.  Does the plan provide for direct rollovers?

[Paul I]

The answer will depend in part on the plan document.  I have seen documents where the Adoption Agreement has an election to cash out less than $200 vested account balances immediately.  I also have seen documents where the definition of an eligible rollover distribution in the paired Basic Plan Document explicitly excluded these distributions.

Is the notice language that no response to the request for the distribution form will result in a rollover to an IRA based on the plan document, a procedure implemented by the Plan Administrator, or the IRA provider service agreement?  If the document says the under $200 distributions are not eligible for rollover, then there could be a conflict between the procedure and the plan document (and the document wins every time.)