Withholding requirements for foreign receipt of US-earned pension

[Guest Julie Silverstein]

A participant lived in the US, worked for a US company, participated in the company's pension plan and earned a benefit. The participant then terminated employment and moved to Australia. We got election forms from her and are now trying to have the plan make the distribution to her.

Is the plan required to withhold 20% for federal taxes (she elected not to roll to an IRA)? I know that state withholding is not required for the state in which the company is located if the participant receives the benefit in a different state. But what about different countries?

Any insight would be helpful.

[Guest]

Is the former employee a U.S. citizen or resident alien?

[Guest Julie Silverstein]

I don't know her status, and I thought it wouldn't matter. Upon further research I find it may, but I'm still not sure.

IRC 3405© says to withhold 20% on any eligible rollover distribution that is not rolled over. IRC 3405(e)(13) says a participant can elect out of withholding if she is not a US citizen or resident alien. But this seems to point to IRC 3405(a) or (B) only, and 3405© overrides (a) and (B). If the distribution IS an eligible rollover distribution, are we therefore stuck with 20% regardless of the participant's status?

[Guest]

You need to also look at the U.S. - Australia tax treaty to see if the participant is a resident of Australia and entitled to special tax benefits on pension payments.