Mandatory Federal Withholding - Form W4-R

This is a bit of a weird question, but would anyone be able to cite IRS code that dictates the 20% mandatory withholding policy?  There is a participant that has immense medical expenses that are itemized on their return and will not owe any taxes.  The CPA wants to know why I can't waive the mandatory withholding.  They've sent over a W-4R and explained that according to the IRS, this form will allow the election of 0% withheld.

I'm certain that this does not allow the withholding to be lower than 20%, but I can't find a good citation to express this.  I am aware of topic No. 412, but they are caught up on the 'lump sum' 'entire account balance' language.  The plan allows the participant to take a partial distribution, but I'm pretty sure this mandatory withholding rule would still apply.

WDIK has the correct code cite.

In addition, the instructions to Form W-4R state (emphasis added):

Quote

Eligible rollover distributions—20% withholding.

Distributions you receive from qualified retirement plans (for
example, 401(k) plans and section 457(b) plans maintained
by a governmental employer) or tax-sheltered annuities that
are eligible to be rolled over to an IRA or qualified plan are
subject to a 20% default rate of withholding on the taxable
amount of the distribution. You can’t choose withholding at a
rate of less than 20% (including “-0-”). Note that the default
rate of withholding may be too low for your tax situation. You
may choose to enter a rate higher than 20% on line 2. Don’t
give Form W-4R to your payer unless you want more than
20% withheld.

Of course, this assumes that the distribution in question is an eligible rollover distribution. Is it? If this is a 401(k) hardship distribution, for example, that would not be an eligible rollover distribution and the 10% (not 20%) automatic withholding could be waived.

Thank you, WDIK & C. B. Zeller!  This has come down to a clarification of terminology.  It is an eligible rollover distribution from a qualified employer plan.  The 'nonperiodic payments' section of the W4-R instructions was the culprit for their misunderstanding.  Only applicable to IRAs...

Thanks again!

If the distributee is employed and perceives that Federal income tax withholding on the eligible rollover distribution might result in too much paid-in toward the year’s Federal income tax, the individual might evaluate whether to lower withholding from wages for the remainder of the year.

While the plan’s administrator and its service providers might not present such a suggestion, the certified public accountant might consider it.

Great point, Peter.  I believe they've prevented withholding anywhere possible due to extremely high medical expenses, but I will mention it (Excess of 1M).  Unfortunately, this is not a situation where the withholding can be avoided.  They will just have to wait for the refund.

Thanks for your comment!

Bingo! Bri hit the nail on the head.