Articles | August 11, 2022

Get Ready for the New IRS Pension Tax Withholding Forms

To match individuals’ withholding instructions to changes in tax law, the IRS has issued redesigned tax withholding forms for both monthly pensions and annuities (Form W-4P) and one-time payments and rollovers (Form W-4R). While optional for tax year 2022, plan sponsors for all public and private retirement plans are required to start using both forms beginning January 1, 2023.

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The new Form W-4P is more complex than the current Form W-4P both for participants and plan administrators. The complexity will require major changes to payment processing software.

With less than five months until the acceptance date, time is tight for pension plan sponsors to get ready to process the new forms.

What do the new forms look like?

The IRS has published the 2022 Form W-4P and the 2022 Form W-4R.  The W-4P is for periodic payments and the W-4R is for non-periodic payments. The W-4R is relatively straightforward; the new W-4P is considerably more complex than the current one.

How ready are you to process the new forms?

These are some of the key challenges:

  • Your federal tax withholding software calculation processes will need to be updated. Has your payment software team started to make the necessary updates?
  • Your tax withholding software will also need to account for participants who submitted the old forms. The IRS has defined a “bridge” calculation method you’ll need to implement.
  • If you have online self-service tax withholding processes, they’ll also need to be updated.
  • The complexity of the new Form W-4P will make it harder for your staff and software to validate whether the form has been completed properly.
  • Creating a simplified version of the form for your participants will likely not be possible.
  • You’ll need to prepare your team to help participants complete the forms because they will have questions.
  • You’ll need to decide whether to implement these changes before or on January 1, 2023.

Keep in mind that the states you work with may have already made similar changes to their tax withholding requirements or may be planning to do so. It’s important to check the department of revenue website for each of the states you work with to determine if the state’s tax withholding forms have been updated.  If so, you will need to prepare for changing both federal and state and tax withholding software.

Action items

To get ready for the new IRS pension tax withholding forms, first assess how these changes will impact how you pay benefits. That will enable you to determine your readiness and, if there’s much work to be done to get ready, identify the steps to take. That might include working closely with your vendors and training your team.

We can assist with those operational assessments and recommend specific strategies, tasks and timelines. We can also test software revisions and assist in implementing new procedures. We can even provide full- or part-time consultants to lead and expedite the software component of your tax withholding project.

We’ve worked with many clients to help them prepare their software for the coming tax-withholding form changes. Let’s have a conversation about how we can help you get ready for the January 1, 2023 finish line.

Need Help Gearing Up for the New Tax Withholding Forms?

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Please note that Segal is neither an accounting firm nor a tax firm and specific questions about the interpretation of the tax rules governing withholding should be directed to the plan’s accountants or lawyers.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.