Part I

26 CFR 31.3405(e)-1: Questions and answers relat- ing to withholding on pensions, annuities, and cer- tain other deferred income

TD 10008

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 31

Withholding on Certain Distributions under Section 3405(a) and (b)

AGENCY : Internal Revenue Service (IRS), Treasury.

ACTION : Final regulation.

SUMMARY : This document contains a final regulation regarding income tax withholding on certain periodic payments and nonperiodic distributions from employer deferred compensation plans, individual retirement plans, and commercial annuities that are not eligible rollover distributions. The regulation addresses a payor’s obligation to withhold income taxes in the circumstances in which those payments or distributions are made to payees outside of the United States and affects payors and payees of those periodic payments and nonperiodic distributions.

DATES : Effective date. This regulation is effective October 21, 2024.

Applicability date. This regulation applies with respect to payments and distributions made on or after January 1, 2026. However, taxpayers may apply it to earlier payments and distributions.

FOR FURTHER INFORMATION CONTACT : Jeremy Lamb at (202) 3174575 or Isaac Stein at (202) 317-6320 (not toll-free numbers).

SUPPLEMENTARY INFORMATION :

Authority

Section 7805(a) authorizes the Secretary to prescribe all needful rules and regulations for the enforcement of the Code.

Background

Section 3405(a)(1) of the Internal Revenue Code of 1986 (Code) requires the payor of any periodic payment to withhold income tax from the payment. Under section 3405(a)(2), an individual generally may elect not to have section 3405(a)(1) apply with respect to periodic payments made to the individual. Section 3405(b)(1) requires the payor of any nonperiodic distribution to withhold income tax from the distribution. Under section 3405(b)(2), an individual generally may elect not to have section 3405(b)(1) apply with respect to any nonperiodic distribution.

Section 3405(e)(2) defines a periodic payment as a designated distribution that is an annuity or similar periodic payment. Section 3405(e)(3) defines a nonperiodic distribution as any designated distribution that is not a periodic payment. A designated distribution is defined in section 3405(e)(1) as generally any distribution or payment from or under an employer deferred compensation plan, an individual retirement plan (as defined in section 7701(a)(37) of the Code), or a commercial annuity. For this purpose, an employer deferred compensation plan is defined in section 3405(e)(5) as any pension, annuity, profit sharing, or stock bonus plan or other plan deferring the receipt of compensation, and a commercial annuity is defined in section 3405(e) (6) as an annuity, endowment, or life insurance contract issued by an insurance company licensed to do business under the laws of any State.

Section 3405(e)(1)(B) identifies certain amounts or payments that are not a “designated distribution” for purposes of section 3405 withholding. Under section 3405(e)

(1)(B)(iii), any amount that is subject to withholding under subchapter A of chapter 3 of the Code (relating to withholding of tax on nonresident aliens and foreign corporations) by the person paying such amount or which would be so subject but for a tax treaty is not a designated distribution.

Section 3405(e)(13)(A) provides generally that, in the case of any periodic payment or nonperiodic distribution that is “to be delivered outside of the United States and any possession of the United States,” no election may be made under section 3405(a)(2) or (b)(2) with respect to such payment, with the result that withholding may not be waived. Section 3405(e)(13) (B) provides that section 3405(e)(13)(A) does not apply if the recipient certifies to the payor, in such manner as the Secretary of the Treasury may prescribe, that the recipient is not (i) a United States citizen or a resident alien of the United States, or (ii) an individual to whom section 877 of the Code applies. Section 877(h) provides that section 877 applies to certain nonresident alien individuals whose expatriation date, as defined in section 877A(g)(3), is before June 17, 2008.