W-8BEN and Payor Liability/Responsibility

Questions:

When a non-resident alien provides a 403(b)(9) non-electing church retirement plan with Form W-8BEN, indicating he/she is eligible for a reduction in federal withholding based on a treaty with the US (example: US - Canada Treaty), can the plan:

1. Simply accept the form and its claim or is there a particular review the plan must first do and what is the plan's ultimate liability to ensure the information is true?

2. Require 30% withholding on any distribution to a non-resident alien as a plan policy?

1. the plan's liability is 1099 reporting (and withholding) errors -- the plan is liable for the tax if they get it wrong.  The form has to pass the smell test, the plan must confirm the form info.

2. a "we don't check, we just withhold to be safe" policy doesn't work.

What I can tell you if a Canadian has to file a return from Canada to get some part of the 30% refunded to them they will almost certainly have to hire an accountant in Canada who is a specialist in this kind of cross boarder taxes.  

And I know this from experience as I was part of mistakenly withholding 30% on a Canadian.  It was such a difficult process for him to help keep goodwill with the client, who was a large client, we agreed to reimburse this guy for the cost of the accountant.  In our case ESOPs delay payment long enough often times the person doesn't have W-2 income in the year of payment. So the filing was exclusively for this payment.  

I realize you tend to focus on the plan but if the client cares at all about their alumni are treated they might not care for a 30% withholding policy.   

I will leave it to others who know more to decide what the law says but we rarely question a W-8Ben if the client seems to agree the person is living on the other country and they should be paid based to an address in that country. 

A payer might check carefully whether a distributee’s withholding certificate:

is completed according to the form and its instructions;

is internally consistent;

is logically consistent with facts known to the plan or its payer;

does not present a statement the payer knows to be false;

includes the supporting documentation the form or its instructions requires;

shows nothing that suggests a false document or a forgery.

Among other law sources, regulations to interpret and implement Internal Revenue Code of 1986 § 1441 are 26 C.F.R. §§ 1.1441-1 to -9. The table of contents for those sections is 26 C.F.R. § 1.1441-0, https://www.ecfr.gov/current/title-26/section-1.1441-0.

The rules are complex, detailed, and include many internal definitions.

In general: “A withholding agent must withhold 30 percent of any payment of an amount subject to withholding made to a payee that is a foreign person unless it can reliably associate the payment with documentation upon which it can rely to treat the payment as made to a payee that is a U.S. person or as made to a beneficial owner that is a foreign person entitled to a reduced rate of withholding.” 26 C.F.R. § 1.1441-1(b)(1), https://www.ecfr.gov/current/title-26/part-1/section-1.1441-1#p-1.1441-1(b)(1).

Also, a payer might maintain a table or list with each nation’s income tax treaty withholding rate. Some payers’ systems integrate this in the distribution-processing software.

Consider that applying 30% withholding without checking whether the distributee properly claims lesser withholding might deprive the distributee of a right under applicable law or the plan.

This is not advice to anyone.

A retirement plan’s administrator or its service provider might prefer to act carefully to maintain a participant’s or beneficiary’s respect and good will.

Doing so calls for at least respecting a proper claim for withholding at a treaty’s rate (including, if applicable, a zero). That might help a distributee avoid an otherwise unnecessary tax return.

Many church plans provide communications to help a participant or beneficiary become aware of treaty-claiming opportunities.

If a plan’s administrator or its service provider sees that a claim specifies a non-U.S. address but does not include a Form W-8BEN, someone might ask the claimant whether the omission is deliberate or inadvertent.

A review of a withholding certificate typically does not investigate whether its statements of fact are true, but does check whether the administrator or payer knows a statement to be false or inconsistent with the plan’s records.

While I am known for writing plan provisions beyond the norms, I doubt a mere plan provision could grant a § 403(b) plan’s insurer, § 403(b)(7) custodian, or § 403(b)(9) retirement income account administrator a power to withhold from a nonalienable distribution more U.S. Federal income tax than applicable law commands.

Might it be simplest to follow the tax law rules?

This is not advice to anyone.