Tax Withholding on Minimum Distributions

[Guest David Danziger]

Every one knows that Minimum Distributions are not Eligible Rollover Distributions, and therefore, are not subject to 20% withholding.

However, minimum distributions ARE subject to withholding. My questions is this: are Minimum Distributions "Periodic" or "Non-Periodic" distibutions? The answer affects the manner in which withholding is calculated.

I believe that minimum distributions are periodic distributions, even when they are paid out of individual account plans. This is because the distributions are calculated on the basis of life expectency, and paid over life. The fact that a participant could elect to accelerate distributions in the future should not impact their classification in the current year.

I seem to recall that, before the days of "Eligible Rollover Distributions" (i.e., before the UCA took effect in the early 90's), we treated minimum distributions as non-periodic. However, the regs defining Eligible Rollover distributions now make a compelling case that minimum distributions are "Periodic."

Has anyone seen official guidance on this question? Should minimum distributions always have been subject to withholding as periodic distributions, or has there been a change over the years (officially recognized or not)?

[Tom Poje]

IRC 402©(4)(A)

Exception for certain periodic distributions

A payment is NOT an eligible rollover distribution if it is a part of a series of substantially equal payments over the life or life expectancy of the participant...

see ERISA Outline Book by Sal Tripodi

"Definition of an eligible rollover distribution"

Any amount required to be distributed under 401(a)(9) is NOT an eligible rollover distributionIRC 402©(4)(B)

If an individual receives more than the required minimum distribution, that portion IS subject to withholding since it could have been rolled over, though when determining the amount, you are permitted to figure it based on single life, even if Joint life has been selected as method for determing the minimum distribution.

[david shipp]

Just went through the same discussion. Couldn't find anything specific from the IRS but the concensus of administrators I talked to was that any distribution made under the DC calculation process of the 401(a)(9) regs would be a "periodic" payment and thus subject to withholding as a periodic payment (standard wage withholding, default - married with 3 exemptions).

Practically, it would appear that the nonperiodic approach of 10% withholding would actually over-withhold in all but the largest distributions so there may not be much payor liability for using this approach.

[Guest greymann]

Note that if the life expectancy payments are made from an IRA, instead of a retirement plan, the payments would NOT be considered periodic payments and thus would be subject to 10% withholding. (Reg.Section 35.3405-1, Q&A F-15).