April 2, 2009

New Federal Tax Withholding Tables Apply to Pension Payments

The updated 2009 Federal Income Tax Withholding Tables, which took effect on April 1, 2009,1 also should be used to determine withholding on pension payments. The Internal Revenue Service (IRS) confirmed this practice in two recent publications.2

Background

The "immediate" stimulus in the American Recovery and Reinvestment Act (commonly referred to as the Stimulus Bill) was the "Making Work Pay" tax credit. That credit was intended to put more money into the pockets of taxpayers as quickly as possible. To implement the credit, the IRS revised the income tax withholding tables for 2009 to reduce the amount of federal income tax withheld at applicable income levels and thereby increase take-home pay.

Implications for Pensioners

Although the tax credit only applies to wage and salary income (i.e., to "earned income" under the Internal Revenue Code), the IRS has instructed that the new tables are to be used to calculate withholding on pension payments even though pension payments are not earned income. IRS representatives confirm that this approach is intentional.

This will give many pensioners a little more money to spend currently. However, for some pensioners, it may mean that not enough is being withheld from their benefits to cover the tax they owe for the year. While the total dollar amounts of the credit are small ($400 single/$800 married filing jointly), an unexpected tax bill in 2010 nonetheless could be a problem.

Several advocacy groups are raising this issue with the Treasury Department/IRS and in Congress. However, unless and until there is some official change in position, pension funds are required to use the new tables.

Implications for Plan Sponsors

Plan sponsors may want to raise this issue with their legal counsel and discuss whether to notify pensioners about this change.

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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on and the latest IRS information on required minimum distributions. The Segal Company can be retained for assistance with updating plan documents and preparing determination letter submissions.

1
The new tables were published in Notice 1036, Early Release Copies of New Wage Withholding and Advance Earned Income Credit Payment Tables. (Click on the following text to return to the Compliance Alert.)
2
See IRS Publication 15, (Circular E), Employer's Tax Guide, and IRS Publication 15-T, New Wage Withholding and Advance Earned Income Credit Payment Tables. (Click on the following text to return to the Compliance Alert.)

Compliance Alert, The Segal Company's periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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