On May 31, the IRS issued a proposed regulation — presented in Q & A format — concerning income tax withholding obligations on non-rollover distributions from employer-sponsored plans — including pension, annuity, profit sharing, stock bonus and any other deferred compensation plan — to destinations outside the U.S. Unlike U.S. payees, non-U.S. payees cannot elect to forego income tax withholding on such distributions.

Current Guidance

Notice 87-7 provides current guidance concerning withholding obligations on non-rollover distributions. The Notice provides:

• If the payee provides the payor with a residential address outside the U.S., the payor is required to withhold.

• If the payee provides the payor with a residential address within the U.S., the payor is required to withhold unless the payee has elected no withholding.

• If the payee does not provide any residential address, the payor is required to withhold.

Proposed Regulation

The proposed regulation is based on, and provides clarification concerning, the guidance provided in Notice 87-7. The proposed regulation provides:

• Withholding obligations apply and cannot be waived where the payee provides a U.S. residential address but provides payment instructions indicating the funds are to be delivered outside of the U.S.

• Withholding obligations apply and cannot be waived where the payee provides a non-U.S. residential address, without regard to the delivery instructions — including an instruction to deliver the distribution to a financial institution located in the U.S.

This clarification is an acknowledgement of the ease with which funds deposited in a U.S. financial institution can be withdrawn by a person located outside the U.S. and of the fact that a payee’s residential address is most likely the location of ultimate distribution.

• Withholding obligations apply and cannot be waived where the payee has not provided a residential address.

• Withholding obligations apply and can be waived where the payee provides a military or diplomatic post office address.

Proposed Applicability Date

The new withholding rules will apply to distributions that occur after the proposed regulation is finalized, at which point it will supersede Notice 87-7. Until then, payors can continue to rely on Notice 87-7 as well as the proposed regulation’s rule concerning military and diplomatic post office addresses.

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Photo of Stephanie O. Zorn Stephanie O. Zorn

Stephanie O. Zorn is Of Counsel in the St. Louis, Missouri, office of Jackson Lewis P.C.

Ms. Zorn has over twenty years of experience representing management in employee benefits and employment matters, both as in-house counsel and in private practice.

Ms. Zorn’s employee…

Stephanie O. Zorn is Of Counsel in the St. Louis, Missouri, office of Jackson Lewis P.C.

Ms. Zorn has over twenty years of experience representing management in employee benefits and employment matters, both as in-house counsel and in private practice.

Ms. Zorn’s employee benefits practice includes counseling clients with regard to plan compliance, administration, participant disclosures, reporting and drafting requirements under ERISA, the Internal Revenue Code, ACA, HIPAA and COBRA.  Ms. Zorn assists clients with a broad range of plans, including retirement plans, welfare benefit plans, nonqualified plans, executive compensation plans, severance plans and voluntary early retirement plans.  Ms. Zorn’s practice includes counseling clients on fiduciary compliance — including investment selection, service provider reviews and plan committee issues — and merger and acquisition issues.  Ms. Zorn also represents clients in a range of employee benefits claims and litigation, including ERISA claims for plan benefits and COBRA compliance challenges.

Ms. Zorn’s employment practice consists of counseling and defending employers in connection with discrimination, harassment, disability accommodations, family and medical leave and wage and hour matters.  Ms. Zorn also assists clients with reductions in force and reorganizations, noncompete and confidentiality agreements, retention agreements, service provider classification, outsourcing and international labor and employment matters.

Ms. Zorn is a frequent speaker on employee benefits and employment law issues, including federal health care reform and discrimination laws.