Exempt from withholding?

[Guest benefitsanalyst]

We have a NQ deferred comp plan where a participant left the company last year and is going to receive a lump-sum payment now. He submitted a W-4 stating that he is EXEMPT from Federal Income Tax. Is the company required to take standard withholding? or can we accept the fact that he is stating he is exempt from Federal withholding?

[Harwood]

"Generally, you must send to the IRS copies of certain Forms W-4 that you received during the quarter from employees still employed by you at the end of the quarter. Send copies of Form W-4 when the employee claims (a) more than 10 withholding allowances or (b) exemption from withholding and his or her wages would normally be more than $200 per week. Send the copies to the IRS office where you file your Form 941."

"Base any employee income tax withholding on the Forms W-4 that you send in unless the IRS notifies you in writing to do otherwise."

http://www.irs.ustreas.gov/pub/irs-pdf/p15.pdf