Withholding on distributions to nuns

[david shipp]

Where a nun is receiving income from an employer that is associated with her order, and she turns over her income under a vow of poverty, the IRS has ruled that her income was excludable from income tax and was not wages subject to withholding (RR68-123).

How are qualified plan withholding rules applied to a nun, assuming the vow of poverty continues to apply?

Sec. 3405(a) indicates that withholding on periodic payments should be the amount which would be withheld if such payment were the payment of wages from an employer to an employee. In this case, it would appear that no withholding would be required.

Sect. 3405©dealing with eligible rollover distributions, however, specifically states that 3405(a)does not apply and that withholding shall equal 20%.

Query-

Is there any justification for not withholding on an eligible rollover distribution? (The eligible rollover distribution withholding rules were intended to encourage rollovers. Is that goal any less desirable where the distributee is a nun? Since the distribution will be turned over to the order under the vow of poverty whenever it is distributed, does it make any difference? If wages paid were not taxable to the nun, presumably the pension distibution is also not taxable.)

What are plans actually doing?