W-4R necessary?

I am a bit confused on the W-4P and W-4R usage. 

Lets assume a lump-sum distribution, rollover eligible.  If a participant requests a distribution from a plan and completes a distribution form that includes a section where he/she can elect the withholding that they want to apply, is it also necessary that the participant complete  a W-4R? 

Along the same lines, I have seen some TPAs use a distribution form that has an election to pay the participant "In a single payment of my entire account balance, less required 20% withholding".  If the person chooses that election, do they also need to complete a W-4R form?

Thanks!

We do not provide the W-4R.  We advise them that applicable taxes will be taken but they can request an additional amount on the form. 

I raised this question a little while ago. I think it is advisable to provide the W-4R, but it does not have to be completed.

23 hours ago, Riley Britton said:

We do not provide the W-4R.  We advise them that applicable taxes will be taken but they can request an additional amount on the form. 

Do you also advise them that withholding is optional?

The W-4R may be optional, but I don't think you can just go ahead and do RMDs without informing the participant her rights at some time.  The W-4P/R are good elections in perpetuity until they are changed, so once is good enough.  So, once someone fills out a form they should be good to go withholding-wise.  Unless the form doesn't say the election stands for any future RMDs.

However, I find way too many RMDs just go out with the 10% penalty tax defaulted without any input from the participant.

I for one am not comfortable making personal tax decisions for participants.

My understanding is that, starting in 2023, the IRS will not consider a withholding election to be valid unless the participant was provided with the information contained in the Form W-4R, including the marginal rate tables. The election can be made on a different form, but the alternate form has to meet the IRS's requirements.

I have heard that some service providers are taking the approach of providing IRS Form W-4R along with their own distribution forms, and telling participants that they can make an alternative withholding election by returning a completed Form W-4R, otherwise the default withholding will apply. This seems like a reasonable approach to me.

16 minutes ago, BG5150 said:

The W-4R may be optional, but I don't think you can just go ahead and do RMDs without informing the participant her rights at some time.  

I agree completely. Advising participants of their right to elect an alternative withholding amount or waive withholding entirely: it's not just a good idea, it's the law! see IRC 3405(e)(10)(B)

20 minutes ago, BG5150 said:

The W-4P/R are good elections in perpetuity until they are changed, so once is good enough

This I am not sure if I agree with. W-4P is for periodic payments, so clearly that election is designed to apply to an entire payment stream. W-4R though is for a single payment, so my inclination would be that it would only apply to the payment being made at the time the form is completed.

44 minutes ago, C. B. Zeller said:

My understanding is that, starting in 2023, the IRS will not consider a withholding election to be valid unless the participant was provided with the information contained in the Form W-4R, including the marginal rate tables. The election can be made on a different form, but the alternate form has to meet the IRS's requirements.

Do you have a cite for that?

A cite for what part? That the alternate form has to include the marginal rate tables?

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

Quote

Form W-4R Marginal Rate Tables

The 2022 Publication 15-A provides that electronic substitutes for Form W-4R must exactly replicate the Marginal Rate Tables (inclusive of all related text above and within the tables) as they appear on the paper Form W-4R. Some payers have asked whether electronic substitutes to Form W-4R can provide a link to a new web page that provides the Marginal Rate Tables rather than providing the tables themselves.

An electronic substitute to Form W-4R can provide a link to a web page with the Marginal Rate Tables, inclusive of all related text on the first page of the W-4R starting with the text "2022 Marginal Rate Tables", as well as the applicable Specific Instructions, starting with "Suggestion for determining withholding", rather than providing the tables (and related first page text) themselves, but the link must be immediately below line 2 on the electronic substitute form and be preceded by the following text:

The link below will take you to the 20XX Marginal Rate Tables. You may use these tables to help you select the appropriate withholding rate for this payment or distribution. Instructions on how to best use them are included.

Paper Substitute Forms to Forms W-4P and W-4R

While the 2022 Publications 15-A and 15-T provide guidance concerning electronic substitutes to paper Forms W-4P and W-4R, they do not address substitute paper forms. Some payers have inquired about guidelines for paper substitutes to these forms.

When providing paper substitute forms for Forms W-4P and W-4R, payers should generally follow the same guidelines that apply for electronic substitutes to Forms W-4P and W-4R, except where those guidelines apply only in the context of electronic substitutes (such as instructions concerning pop-ups and hoverboxes). In addition, paper substitute forms must include the applicable form's instructions and worksheets rather than providing a web address where the payee can find the applicable form on IRS.gov.

thanks!

On one of the detail points mentioned above:

Form W-4R (for a nonperiodic distribution, whether rollover-eligible or not) includes, in its general instructions, this statement:

. . . .  Your withholding choice (or an election not to have withholding on a nonperiodic payment) will generally apply to any future payment from the same plan or IRA. Submit a new Form W-4R if you want to change your election.

https://www.irs.gov/pub/irs-prior/fw4r--2022.pdf

On 12/15/2022 at 12:37 PM, BG5150 said:

Do you also advise them that withholding is optional?

The W-4R may be optional, but I don't think you can just go ahead and do RMDs without informing the participant her rights at some time.  The W-4P/R are good elections in perpetuity until they are changed, so once is good enough.  So, once someone fills out a form they should be good to go withholding-wise.  Unless the form doesn't say the election stands for any future RMDs.

However, I find way too many RMDs just go out with the 10% penalty tax defaulted without any input from the participant.

I for one am not comfortable making personal tax decisions for participants.

 

I was not referring to RMDs, just normal withdrawals at termination. RMDs are provided the W-4

Thanks, Peter.  There was similar language on the W-4P

BUT:  does an election on a W-4P continue over to the new W-4R?

To go further, do they HAVE to get a new 4-4R because of the tax tables?

I don’t know whether any Treasury rule or Internal Revenue Service guidance provides for or against what you ask. Absent that knowledge, here’s my guess at a practical path.

If an old W-4P election properly set withholding for a periodic distribution, continue that election until the distributee changes it.

If an old W-4P election properly set withholding for a series of standing-instruction minimum distributions, continue that election until the distributee changes it.

If an old W-4P election properly set withholding for a nonperiodic single-sum distribution for 100% of the account and the plan’s procedures and forms carefully provide for a cleanup payment to get rid of after-flow contributions, dividends, and restoration credits, apply the preceding withholding election to the cleanup payment.

If a distribution is newly requested (such that a distributee is filling-out a new electronic or paper form), use the new withholding-certificate form or an IRS-recognized substitute.

Perhaps BenefitsLink mavens who know more than I do might add more information.