New forms W4-R and W4-P

We still prep some distribution forms for plans that are not on a platform. For RMDs, we have a box where they tell us how much to withhold, or if they want to elect out. We've always considered this as a substitute W4-P; not sure if it is totally legit or not but it gets the job done.

Do we need to do something differently starting next year? I get the idea that this is more about carving up the form into two, one that generally applies to periodic payments (W4-P) and the other for RMDs and rollovers (W-4-R). I'm not sure I see a problem with what we are doing but logic never has anything to do with it in this business.

Beyond publications and instructions, the Internal Revenue Service on September 1 published a webpage with recent guidance about substitutes for Form W-4R and Form W-4P.

https://www.irs.gov/forms-pubs/additional-guidance-for-substitute-and-telephonic-submissions-of-forms-w-4p-and-w-4r

IRS Publication 15-A, Employer’s Supplemental Tax Guide, states requirements for substitutes, including electronic submissions.

https://www.irs.gov/pub/irs-pdf/p15a.pdf

When a recordkeeper processes millions of tax-withholding instructions, small process improvements can make it worthwhile to discern just how much one may or should do in adapting these substitutes.

Your description about your circumstances suggests you might practically limit how much attention, time, and effort—if any—to put on adapting from the IRS forms to your clients’ substitutes.

The IRS’s revisions seek to push a distributee to estimate carefully how much withholding she asks for. So, one might be cautious about omitting anything in how a user steps through the IRS’s logic path and arithmetic.

BenefitsLink just posted in today’s news the IRS’s draft of the 2023 version of Publication 15-A.

https://benefitslink.com/news/index.cgi

Bird, IRS says for non-periodic payments, you have to include the latest marginal rate tables to assist payees to determine a rate to enter (if you don't already have that on the form), and for periodic payments you have to replicate all the steps and instructions on W4-P. Since you would have to update them every year, seems like you may be better off just giving out the actual IRS forms. 

19 hours ago, bito'money said:

Bird, IRS says for non-periodic payments, you have to include the latest marginal rate tables to assist payees to determine a rate to enter (if you don't already have that on the form), and for periodic payments you have to replicate all the steps and instructions on W4-P. Since you would have to update them every year, seems like you may be better off just giving out the actual IRS forms. 

 

Thanks! That's what I was looking for.

What's the penalty for not using the W4-R? For example, using Bird's current methodology, where the participant simply elects a different amount - if there's no penalty, is it a problem?

13 minutes ago, Belgarath said:

What's the penalty for not using the W4-R? For example, using Bird's current methodology, where the participant simply elects a different amount - if there's no penalty, is it a problem?

The penalties are that the "payor" is liable for not withholding per the statute.  The IRS has interpreted the new rules to mean that failure to do what they say is by definition failure to withhold correctly (i.e. how do you know what is the correct withholding *unless* you've used their forms).  It has always bee the case that the "payor" is liable for the taxes due.  Generally (at least in the past), as long as the correct tax was ultimately paid (i.e. the participant filed their 1040 form correctly), then it was a wash.  However, our "project" on implementing the new forms has determined that inaccurate withholding can trigger many other penalties (and I won't enumerate them here).  Outside counsel (well known, large law firm) has "strongly recommended" using the IRS forms verbatim - and that is what we are doing (well, we've "duplicated" the forms to be included in the DocuSign distribution package, and annual notice to participants receiving installment distributions).  Lots of people not happy about that (including our operations/disbursement teams), but ....

Thanks MoJo. But maybe I'm asking the wrong question. I'm talking about specifically non-periodic payments. So if eligible rollover distribution, mandatory 20% withholding unless they choose a higher amount. For a non-ERD, 10% unless they elect otherwise.

So, if I'm understanding what you are saying, the IRS is saying that if you withhold correctly at 20%, it is "deemed" incorrect by the IRS? Or are you referring specifically to periodic payments/annuity payments, or situations where they want a HIGHER amount withheld?

Thanks - sorry if I'm being dense...

4 hours ago, Belgarath said:

Thanks MoJo. But maybe I'm asking the wrong question. I'm talking about specifically non-periodic payments. So if eligible rollover distribution, mandatory 20% withholding unless they choose a higher amount. For a non-ERD, 10% unless they elect otherwise.

So, if I'm understanding what you are saying, the IRS is saying that if you withhold correctly at 20%, it is "deemed" incorrect by the IRS? Or are you referring specifically to periodic payments/annuity payments, or situations where they want a HIGHER amount withheld?

Thanks - sorry if I'm being dense...

 

 

Well, we're playing in hypotheticals here.  The bottom line is that 20% is but a default and bears no relationship to the actual tax due on any given distribution.  We tend to "awfulize" (see the worst case scenario), and have also been told by counsel that *not* giving the participant the right form (W4-R or W4-P) means the participant didn't actually make a choice, and consequently if you withhold 20% and the actual tax rate applicable is higher, and if it isn't paid, then the payor bears responsibility.  It's a stretch - but we've seen similar things happened (where the withhold was wrong itself).  Interestingly, we believe that you *must give* the participant the form, they don't have to return it - but then that is an election to use the defaults (and our package makes that perfectly clear).

Easier to just send a fillable blank pdf of the form than to try and do something else.....