Excess Tax Withheld for Canadian Retiree With US Pension

[EPCRSGuru]

I am posting this in several Benefitslink boards as I am not certain where it best belongs.  We have a retiree who worked for several years for us (a U.S. company) while living in the US.  She is a Canadian citizen and was here on an H-1B visa.  She has since returned to Canada and was receiving regular monthly installments from a 401(a) plan until her account was depleted in 2024.  When we changed recordkeepers the new recordkeeper did not receive a W-8BEN from the prior recordkeeper so they withheld 20% in Federal taxes.  Apparently this was an error and they should have withheld 15%.  Now the participant is unhappy and wants the new recordkeeper to refund her the additional 5%.  The new recordkeeper has declined to do so.  We recommended that she get assistance from a Canadian tax advisor, but she reports that the fees would be higher than the amount she would recover.  So we in HR are attempting to help her with the so-it-yourself route.

She now has 1040-S forms for the open tax years (2021-2024).  Is it as simple as filing a 1040-NR and requesting a refund?  I assume the income is "effectively connected with a US Trade or Business" because it was earned while she was a US resident employed by a US employer?  Can it really be that simple?

[ESOP Guy]

The one time this happened to me the firm I worked for agreed to pay for the person to get the needed help from someone who knows how to do this. 

To be clear I was the person who made the mistake. 

I know no one likes to pay for this kind of error but it really does seem like someone owes her this level of curtesy/professional responsibility.   I think it is the new recordkeeper's fault.  They should have a process to ask for a W8Ben if one is not on file 100% of the time.  

Although oddly if there was no W8Ben my understanding the withholding was supposed to be 30% not 20%.  I would look into the current recordkeeper as it really does seem like they don't know the rules about this.  

https://www.irs.gov/instructions/iw8ben#:~:text=Provide Form W-8BEN to the withholding agent or payer,withholding rate under section 3406.

I quote:

Provide Form W-8BEN to the withholding agent or payer before income is paid or credited to you. Failure to provide a Form W-8BEN when requested may lead to withholding at the foreign-person withholding rate of 30% or the backup withholding rate under section 3406.

 

end of quote

 

That was the issue when I made the mistake.  I thought the person had refused to complete the W8ben and they had sent one in the prior year.  I missed that fact.  So I set them up for the 30% instead of the 15% and it wasn't caught in review. 

 

And no I don't think itis income connected with a US Trade or Business.  This person ought to be getting a 1042S from the recordkeeper so in my mind they ought to be helping here.  If you go to the pdf version  https://www.irs.gov/pub/irs-pdf/i1042s.pdf  Appendix A there is a code 15 for pension payments.  If you go to the codes instructions on page 24 it gives the link to the appendix A.  I think the online version takes you to Appendix A also.   

 

Hope that helps. 

[EPCRSGuru]

It does help; thank you.  We have not been successful at asking the recordkeeper to reimburse the participant, which is why we are trying to muddle through ourselves.