IRS Issues Proposed Regulations on Withholding for Qualified Retirement Plan Participants with Non-U.S. Address

For international companies with operations in many countries, complying with local regulations can be complicated by individuals who are from one country, but living in another and thus have a non-U.S. permanent address. In May, the IRS proposed new regulations regarding the required tax withholding that will impact these individuals specifically. Currently, withholdings are required when distributions are made to individuals from retirement plans, IRAs, and other types of retirement plans. In certain circumstances, such as with an individual living abroad, they may want to elect out of the withholding and the proposed IRS regulations aim to clarify this rule.

Clarifying Where New Proposed IRS Withholding Does Not Apply

First, it’s important to note that the new regulation does not apply to rollover distributions, which are retirement plan distributions that are made in lump sums or over short periods. These types of distributions are subject to income tax withholding unless the sums are rolled directly into another tax-qualified plan. Further, the proposed regulations will not apply to nonresident aliens. Their distributions are subject to a different tax withholding rate.

If the retirement plan participant is in the U.S. or a U.S. possession territory, then the retirement plan distribution follows the current withholding rules. This can be found in IRS Code Section 3405 regarding distributions that include periodic payments for the life of the participant or longer than 10 years. Regular IRS withholding under this code section also applies when the distributions are not periodic but are not eligible to roll over into another tax-qualified plan such as an IRA. In each of these situations, the plan participants can choose whether to withhold amounts from their distributions.

Where New Proposed IRS Withholding Applies

The proposed regulation focuses strictly on U.S. citizens who are living and receiving retirement distributions outside of the U.S. and U.S. territories. If the payor is furnished with a residential address outside of the U.S., then the participant cannot elect out of withholding. This includes situations where the residence is outside of the U.S., but payment instructions include forwarding the payment to a bank or other person within the U.S. If there is no residence address provided, then the plan participant is treated as having an address outside of the U.S. and may not, in that case, elect out of withholding.

However, if the address is outside of the U.S., but is a military or diplomatic post office (otherwise known as an APO, FPO, or DPO), then it is treated as a U.S. address, and the participant can choose whether or not to opt-out of withholding on retirement plans.

While these regulations are not final, they give a clear idea of where the IRS plans to go with the regulations and how they anticipate enforcing withholding for qualified retirement accounts. Knowing which rules apply and when those changes take effect are nuances the attorneys at Hall Benefits Law pay attention to so that we can deliver the best possible service to our clients. To learn more, reach out today by calling 678-439-6236 or visit the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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