ABA Comment Letter on Draft IRS Forms W-4P & W-4R

Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

Dear Sir or Madam:

On behalf of our members, the American Bankers Association (ABA) requests your consideration of technical and operational concerns with respect to Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, and the new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions.

The Internal Revenue Service (IRS) has issued early release drafts of the 2022 versions of Forms W-4P and W-4R. Form W-4P would be substantially revised, and Form W-4R is an entirely new form. We understand that the purpose of the revised and new forms is to give taxpayers and the IRS more flexibility and accuracy in determining desired withholding amounts where there are disparate forms of distributions from various types of retirement plans.

Our members have expressed strong concerns about the timing and certain revisions related to the implementation of the forms in 2022. We respectfully ask that you consider the following:

1. Banks Need Sufficient Time to Incorporate New and Revised Forms
   1. Our members currently have in place technology and processes built to accommodate customers who completed the current 2021 Form W-4P or a prior year version. What might seem like a relatively simple “split up” of that form based on the differences between periodic payments and other distribution types actually generates the need for complex process changes. It is challenging to make ANY type of change like this in financial institutions.
   2. To date, there have been three draft versions of the 2022 Form W-4P (dated December 30, 2020, January 29, 2021, and March 12, 2021), and two draft versions of the 2022 Form W-4R (dated December 30, 2020, and March 12, 2021).
   3. Our members have consistently shared with us that designing and implementing the technology updates needed to support a change of this nature typically takes at least 18-24 months. The cover sheet to the second version of the draft 2022 Form W-4P (the more complicated of the two) on IRS.gov seems to acknowledge these timing concerns with the phrase “These computational steps should not change, and this draft form may be relied upon for purposes of starting systems programming.” However, the third version of the draft Form W-4P, which was posted to the IRS website a full six weeks after the previous version, introduced a completely new, albeit optional, feature -- a “computational bridge” that payers can use to calculate equivalent tax withholding on 2022 and future year payments to payees who originally set up their periodic distribution schedules using a 2021 or earlier Form W-4P. Assuming that use of the new forms will be required starting January 1, 2022, there are only eight months remaining for making the system changes discussed above, including the new computational bridge, significantly less than the 18-24 months typically required.
   4. In addition to the technology changes described in this letter, our members indicate that related process changes and training will also require significant lead time. Process changes need to be documented and tested, procedures need to be updated, new internal audit and quality control checkpoints need to be developed, and bank employees working with customers need additional training if they are to be competent at assisting customers with important decisions. Distribution forms used by customers will also need to be updated.
2. Specific Comments on the Draft 2022 Form W-4P
   1. We ask that the elimination of the “no withholding” box from Form W-4P be reconsidered. An instruction requiring the hand-written phrase “no withholding” to be entered in the space below Step 4(c) is confusing, and not in line with clean and efficient processing. Further, we suggest that the “no withholding” box and its instructions be positioned near the top of the page, to help the taxpayer avoid complex calculations of withholding amounts if they are not applicable.
   2. The major changes that will be made to Form W-4P will lead to similar programming challenges with respect to state withholding forms that are based on the 2021 version of Form W-4P.
3. Specific Comments on New Form W-4R
   1. The draft 2022 Form W-4R changes the available withholding options for nonperiodic payments (including all distributions from Individual Retirement Accounts, which are considered “nonperiodic” by Reg. 35.3405-1T, Q&A F-15 regardless of their payment schedule) and eligible rollover distributions. These changes include: eliminating the “no withholding” checkbox; no longer allowing payees to direct the payer to withhold a specific dollar amount of tax in addition to the 10% or 20% default withholding rate; letting recipients of most nonperiodic distributions elect any withholding rate from 0% to 100% of their distribution; and letting recipients of eligible rollover distributions elect any withholding rate from 20% to 100% of their distribution. We ask that the elimination of the “no withholding” box be reconsidered with respect to taxpayers who are not subject to the 10% or 20% default withholding rate. An instruction requiring such taxpayers to enter 0% withholding is confusing, and not in line with clean and efficient processing. Further, we suggest that the “no withholding” box and its instructions be positioned near the top of the page, to help the taxpayer avoid complex calculations of withholding amounts if they are not applicable.
   2. A major challenge posed by the draft Form W-4R is how to calculate withholding for payees who previously elected (on a 2021 or earlier version of Form W-4P) that a specific dollar amount be withheld from each distribution, especially if the payee had a distribution schedule based on single or joint life expectancy or other formula requiring multiple payments to be made over a specified time period. The IRS should explain how IRAs with such elections in place should be handled starting in 2022, since subjecting all such customers to the default rate until they provide a new election on Form W-4R would not be perceived as good customer service.
   3. The current draft instructions for Form W-4R will allow IRA withholding elections above 0%, but below the 10% default tax rate. This is an important change that we request be confirmed as the forms are finalized. In addition, the change raises questions about what to do if an IRA subject to such an election is escheated to the state as unclaimed or abandoned property, or is listed on an IRS Civil Penalty Notice (Notice 972CG) received by the payer and the payee fails to respond to a solicitation mailing by the applicable deadline.
   4. The introduction of new Form W-4R will lead to similar programming challenges with respect to state withholding forms that are based on the 2021 version of Form W-4P.
4. Need for Customer Notice and Guidance
   1. Many clients and customers of our member banks may be left confused as to whether their distribution arrangement is in fact periodic or nonperiodic, despite the guidance that the IRS has provided over the years. We therefore ask that the General Instructions to both Forms make clear when Form W-4R or Form W-4P is appropriate. For example, as noted above, IRAs, even those with monthly, quarterly, or annual scheduled payments, are nonetheless nonperiodic payments under IRS guidance. Making this distinction clearer in layman’s terms on both Forms would be helpful.
   2. Finally, customers will also need to be informed of these changes, through communications and potential training / orientation. The necessary customer interfaces and communications will also take significant time to design and implement.
5. Timing
   1. We strongly recommend that the implementation of the new forms be delayed until January 1, 2023, and that any penalties imposed on payers for failure to meet the new requirements be waived for at least two years thereafter. This will allow for appropriate preparations to be made for successful implementation of the new forms and the related processes and support.

We would be pleased to provide any additional background or support for this request. Please do not hesitate to contact us.

Thank you in advance for your consideration and support.

Sincerely,
John P. Kinsella