Effective January 1, 2023, plan sponsors will be required to use the redesigned Form W-4P and the new Form W-4R. Previously, Form W-4P was used to calculate withholding on pension or annuity payments, whether paid on a periodic or nonperiodic basis. Going forward, the redesigned Form W-4P will be used for periodic pension or annuity payments; the new Form W-4R will be used for withholding on nonperiodic payments and eligible rollover distributions.
The new Form W-4P for periodic payments bears similarities with the Form W-4 that was released in past years. To complete, payees will need to gather the following information first to complete the new Form W-4P:
- Income from job(s) for self and spouse (if filing status is “married filing jointly”)
- Information from W-4s completed for the job(s) of self and spouse (if filing status is “married filing jointly”)
- Income for other annuity payments for self and spouse (if filing status is “married filing jointly”)
- The number of qualifying children under age 17 and the number of other dependents
- Any applicable federal income tax credits
- Any additional amount the payee may desire to be included in the withholding calculated
The new Form W-4R for nonperiodic payments is simple for payees to complete. They need only indicate a withholding percentage if they want a withholding rate other than the default rate of 10% or, if for an eligible rollover distribution, a rate greater than 20%. Note that for plan sponsors, this differs from the previous withholding method, which was the same default rates plus any additionaldollaramount indicated by the payee on the old Form W-4P..
Plan sponsors are not required to obtain new withholding forms for all existing annuity payees; they are required to start using the new forms no later than January 1, 2023 (or 30 days after the 2023 forms are released by the IRS, whichever is later). However, plan sponsors are also required to calculate withholding on annuity payments based on the new tables, whether based on an existing withholding form or a new form. Publication 15-T, Federal Income Tax Withholding Methods, outlines several approaches to calculate withholdings, such as the computational bridge (Page 6) or three different withholding worksheets. All methods require updated programming in the plan sponsor’s payroll system.
Are you prepared for the new forms? Here are some action items to make sure you and your organization are ready:
- Talk with the payroll provider to verify that programming for the new withholding tables is complete.
- Train employees on the new withholding form: the changes, which form to complete depending on the payment type, how participants are to complete it, etc.
- If accepting forms electronically, ensure that the electronic versions are compliant with IRS guidelines (see Publication 15-A, Employer’s Supplemental Tax Guide for requirements). Note that there are additional guidelines specific to Form W-4R.
- Evaluate any changes that may result from the 2023 Form W-4P or 2023 Form W-4R when posted by the IRS, which is currently expected to be released in the coming weeks.