hardship distributions and tax withholding

[Guest cbclark]

Here is hoping we are all safe today, unless of course the 13th on a Friday does not spook you. We have a strange question. Our hardship distribution forms permit a participant to elect to have NO withholding on the distribution.

IRS Form W-4P permits an election to have no taxes taken out of a nonperiodic distribution. The instructions indicate that if there is no form submitted the taxes must be withheld.

If no W-4P is attached but the distribution form electing no withholding is signed, is that enough or does the participant have to have to W-4P accompany the distribution request?

Variation: we have grossed up the hardship for taxes; do they have to be withheld at the time of the distribution?

[Jean]

We always required the form for the initial distribution. Per the W-4P instructions, "Nonperiodic payments—10% withholding. Your payer must withhold at a flat 10% rate from nonperiodic payments (but see Eligible rollover distribution—20% withholding on page 4) unless you choose not to have federal income tax withheld...You can choose not to have federal income tax withheld from a nonperiodic payment (if permitted) by submitting Form W-4P (containing your correct SSN) to your payer and checking the box on line 1. Generally, your choice not to have federal income tax withheld will apply to any later payment from the same plan."

Increasing a hardship for applicable taxes is permitted and does not require that they be withheld at the time of distribution, but the individual could request that they be withheld. It should be no surprise that it is rare that someone would request the additional withholding.

[masteff]

I don't know the exact rules on the use of alternate/substitute forms, but sounds to me like that's what you have. As long as it clearly states that it is for income tax withholding purposes and is signed, I don't know why I'd deny it.

And I agree that it's rare that the amount of withholding used for the gross-up is the same amount actually withheld. Just be sure your gross-up rates are reasonable for the taxpayer based on known facts (ie, eyeball their salary to pick their marginal tax rate).