§ 3405. — Special rules for pensions, annuities, and certain other deferred income.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 26USC3405]
TITLE 26--INTERNAL REVENUE CODE
Subtitle C--Employment Taxes
CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES
Sec. 3405. Special rules for pensions, annuities, and certain
other deferred income
(a) Periodic payments
(1) Withholding as if payment were wages
The payor of any periodic payment (as defined in subsection
(e)(2)) shall withhold from such payment the amount which would be
required to be withheld from such payment if such payment were a
payment of wages by an employer to an employee for the appropriate
payroll period.
(2) Election of no withholding
An individual may elect to have paragraph (1) not apply with
respect to periodic payments made to such individual. Such an
election shall remain in effect until revoked by such individual.
(3) When election takes effect
Any election under this subsection (and any revocation of such
an election) shall take effect as provided by subsection (f)(3) of
section 3402 for withholding exemption certificates.
(4) Amount withheld where no withholding exemption
certificate in effect
In the case of any payment with respect to which a withholding
exemption certificate is not in effect, the amount withheld under
paragraph (1) shall be determined by treating the payee as a married
individual claiming 3 withholding exemptions.
(b) Nonperiodic distribution
(1) Withholding
The payor of any nonperiodic distribution (as defined in
subsection (e)(3)) shall withhold from such distribution an amount
equal to 10 percent of such distribution.
(2) Election of no withholding
(A) In general
An individual may elect not to have paragraph (1) apply with
respect to any nonperiodic distribution.
(B) Scope of election
An election under subparagraph (A)--
(i) except as provided in clause (ii), shall be on a
distribution-by-distribution basis, or
(ii) to the extent provided in regulations, may apply to
subsequent nonperiodic distributions made by the payor to
the payee under the same arrangement.
(c) Eligible rollover distributions
(1) In general
In the case of any designated distribution which is an eligible
rollover distribution--
(A) subsections (a) and (b) shall not apply, and
(B) the payor of such distribution shall withhold from such
distribution an amount equal to 20 percent of such distribution.
(2) Exception
Paragraph (1)(B) shall not apply to any distribution if the
distributee elects under section 401(a)(31)(A) to have such
distribution paid directly to an eligible retirement plan.
(3) Eligible rollover distribution
For purposes of this subsection, the term ``eligible rollover
distribution'' has the meaning given such term by section
402(f)(2)(A).
(d) Liability for withholding
(1) In general
Except as provided in paragraph (2), the payor of a designated
distribution (as defined in subsection (e)(1)) shall withhold, and
be liable for, payment of the tax required to be withheld under this
section.
(2) Plan administrator liable in certain cases
(A) In general
In the case of any plan to which this paragraph applies,
paragraph (1) shall not apply and the plan administrator shall
withhold, and be liable for, payment of the tax unless the plan
administrator--
(i) directs the payor to withhold such tax, and
(ii) provides the payor with such information as the
Secretary may require by regulations.
(B) Plans to which paragraph applies
This paragraph applies to any plan described in, or which at
any time has been determined to be described in--
(i) section 401(a),
(ii) section 403(a),
(iii) section 301(d) of the Tax Reduction Act of 1975,
or
(iv) section 457(b) and which is maintained by an
eligible employer described in section 457(e)(1)(A).
(e) Definitions and special rules
For purposes of this section--
(1) Designated distribution
(A) In general
Except as provided in subparagraph (B), the term
``designated distribution'' means any distribution or payment
from or under--
(i) an employer deferred compensation plan,
(ii) an individual retirement plan (as defined in
section 7701(a)(37)), or
(iii) a commercial annuity.
(B) Exceptions
The term ``designated distribution'' shall not include--
(i) any amount which is wages without regard to this
section,
(ii) the portion of a distribution or payment which it
is reasonable to believe is not includible in gross income,
and
(iii) any amount which is subject to withholding under
subchapter A of chapter 3 (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, or
(iv) any distribution described in section 404(k)(2).
For purposes of clause (ii), any distribution or payment from or
under an individual retirement plan (other than a Roth IRA)
shall be treated as includible in gross income.
(2) Periodic payment
The term ``periodic payment'' means a designated distribution
which is an annuity or similar periodic payment.
(3) Nonperiodic distribution
The term ``nonperiodic distribution'' means any designated
distribution which is not a periodic payment.
[(4) Repealed. Pub. L. 102-318, title V, Sec. 521(b)(38),
July 3, 1992, 106 Stat. 312]
(5) Employer deferred compensation plan
The term ``employer deferred compensation plan'' means any
pension, annuity, profit-sharing, or stock bonus plan or other plan
deferring the receipt of compensation.
(6) Commercial annuity
The term ``commercial annuity'' means an annuity, endowment, or
life insurance contract issued by an insurance company licensed to
do business under the laws of any State.
(7) Plan administrator
The term ``plan administrator'' has the meaning given such term
by section 414(g).
(8) Maximum amount withheld
The maximum amount to be withheld under this section on any
designated distribution shall not exceed the sum of the amount of
money and the fair market value of other property (other than
securities of the employer corporation) received in the
distribution. No amount shall be required to be withheld under this
section in the case of any designated distribution which consists
only of securities of the employer corporation and cash (not in
excess of $200) in lieu of financial shares. For purposes of this
paragraph, the term ``securities of the employer corporation'' has
the meaning given such term by section 402(e)(4)(E).
(9) Separate arrangements to be treated separately
If the payor has more than 1 arrangement under which designated
distributions may be made to any individual, each such arrangement
shall be treated separately.
(10) Time and manner of election
(A) In general
Any election and any revocation under this section shall be
made at such time and in such manner as the Secretary shall
prescribe.
(B) Payor required to notify payee of rights to elect
(i) Periodic payments
The payor of any periodic payment--
(I) shall transmit to the payee notice of the right
to make an election under subsection (a) not earlier
than 6 months before the first of such payments and not
later than when making the first of such payments,
(II) if such a notice is not transmitted under
subclause (I) when making such first payment, shall
transmit such a notice when making such first payment,
and
(III) shall transmit to payees, not less frequently
than once each calendar year, notice of their rights to
make elections under subsection (a) and to revoke such
elections.
(ii) Nonperiodic distributions
The payor of any nonperiodic distribution shall transmit
to the payee notice of the right to make any election
provided in subsection (b) at the time of the distribution
(or at such earlier time as may be provided in regulations).
(iii) Notice
Any notice transmitted pursuant to this subparagraph
shall be in such form and contain such information as the
Secretary shall prescribe.
(11) Withholding includes deduction
The terms ``withholding'', ``withhold'', and ``withheld''
include ``deducting'', ``deduct'', and ``deducted''.
(12) Failure to provide correct TIN
If--
(A) a payee fails to furnish his TIN to the payor in the
manner required by the Secretary, or
(B) the Secretary notifies the payor before any payment or
distribution that the TIN furnished by the payee is incorrect,
no election under subsection (a)(2) or (b)(2) shall be treated as in
effect and subsection (a)(4) shall not apply to such payee.
(13) Election may not be made with respect to certain
payments outside the United States or its
possessions
(A) In general
Except as provided in subparagraph (B), in the case of any
periodic payment or nonperiodic distribution which is to be
delivered outside of the United States and any possession of the
United States, no election may be made under subsection (a)(2)
or (b)(2) with respect to such payment.
(B) Exception
Subparagraph (A) shall not apply if the recipient certifies
to the payor, in such manner as the Secretary may prescribe,
that such person is not--
(i) a United States citizen or a resident alien of the
United States, or
(ii) an individual to whom section 877 applies.
(f) Withholding to be treated as wage withholding under section 3402 for
other purposes
For purposes of this chapter (and so much of subtitle F as relates
to this chapter)--
(1) any designated distribution (whether or not an election
under this section applies to such distribution) shall be treated as
if it were wages paid by an employer to an employee with respect to
which there has been withholding under section 3402, and
(2) in the case of any designated distribution not subject to
withholding under this section by reason of an election under this
section, the amount withheld shall be treated as zero.
(Added Pub. L. 97-248, title III, Sec. 334(a), Sept. 3, 1982, 96 Stat.
623; amended Pub. L. 98-369, div. A, title V, Sec. 542(c), title VII,
Secs. 714(j)(1), (4), (5), 722(h)(4)(A), July 18, 1984, 98 Stat. 891,
962, 963, 976; Pub. L. 99-514, title XI, Sec. 1102(e)(1), title XII,
Sec. 1234(b)(1), title XVIII, Sec. 1875(c)(10), Oct. 22, 1986, 100 Stat.
2416, 2566, 2895; Pub. L. 100-647, title I, Sec. 1012(bb)(2)(A)-(C),
Nov. 10, 1988, 102 Stat. 3534; Pub. L. 102-318, title V,
Secs. 521(b)(36)-(40), 522(b)(1)-(2)(C), July 3, 1992, 106 Stat. 312-
314; Pub. L. 104-188, title I, Sec. 1704(t)(71), Aug. 20, 1996, 110
Stat. 1891; Pub. L. 106-554, Sec. 1(a)(7) [title III, Sec. 314(b)], Dec.
21, 2000, 114 Stat. 2763, 2763A-643; Pub. L. 107-16, title VI,
Sec. 641(a)(1)(D)(ii), (iii), June 7, 2001, 115 Stat. 119.)
Amendment of Section
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
References in Text
Section 301(d) of the Tax Reduction Act of 1975, referred to in
subsec. (d)(2)(B)(iii), is section 301(d) of Pub. L. 94-12, Mar. 29,
1975, 89 Stat. 26, relating to plan requirements for taxpayers electing
additional credits, which was set out as a note under section 46 of this
title and was repealed by Pub. L. 95-600, title I, Sec. 141(f)(1), Nov.
6, 1978, 92 Stat. 2795.
Amendments
2001--Subsec. (c)(3). Pub. L. 107-16, Secs. 641(a)(1)(D)(ii), 901,
temporarily reenacted heading without change and amended text of par.
(3) generally. Prior to amendment, text read as follows: ``For purposes
of this subsection, the term `eligible rollover distribution' has the
meaning given such term by section 402(f)(2)(A) (or in the case of an
annuity contract under section 403(b), a distribution from such contract
described in section 402(f)(2)(A)).'' See Effective and Termination
Dates of 2001 Amendment note below.
Subsec. (d)(2)(B)(iv). Pub. L. 107-16, Secs. 641(a)(1)(D)(iii), 901,
temporarily added cl. (iv). See Effective and Termination Dates of 2001
Amendment note below.
2000--Subsec. (e)(1)(B). Pub. L. 106-554 inserted ``(other than a
Roth IRA)'' after ``individual retirement plan'' in concluding
provisions.
1996--Subsec. (e)(12). Pub. L. 104-188 substituted ``(b)(2)'' for
``(b)(3)'' in closing provisions.
1992--Subsec. (a). Pub. L. 102-318, Sec. 521(b)(36), substituted
``Periodic payments'' for ``Pensions, annuities, etc.'' in heading.
Subsec. (a)(1). Pub. L. 102-318, Sec. 522(b)(2)(A), substituted
``subsection (e)(2)'' for ``subsection (d)(2)''.
Subsec. (b)(1). Pub. L. 102-318, Secs. 521(b)(37)(A), 522(b)(2)(B),
substituted ``subsection (e)(3)'' for ``subsection (d)(3)'' and ``an
amount equal to 10 percent of such distribution'' for ``the amount
determined under paragraph (2)''.
Subsec. (b)(2), (3). Pub. L. 102-318, Sec. 521(b)(37)(B),
redesignated par. (3) as (2) and struck out former par. (2) which
related to amount of withholding.
Subsec. (c). Pub. L. 102-318, Sec. 522(b)(1), added subsec. (c).
Former subsec. (c) redesignated (d).
Subsec. (d). Pub. L. 102-318, Sec. 522(b)(1), (2)(C), redesignated
subsec. (c) as (d) and substituted ``subsection (e)(1)'' for
``subsection (d)(1)'' in par. (1). Former subsec. (d) redesignated (e).
Pub. L. 102-318, Sec. 521(b)(40), substituted ``(b)(2)'' for
``(b)(3)'' in par. (13)(A).
Pub. L. 102-318, Sec. 521(b)(39), amended par. (8) generally. Prior
to amendment, par. (8) read as follows: ``The maximum amount to be
withheld under this section on any designated distribution shall not
exceed the sum of the amount of money and the fair market value of other
property (other than employer securities of the employer corporation
(within the meaning of section 402(a)(3))) received in the distribution.
No amount shall be required to be withheld under this section in the
case of any designated distribution which consists only of employer
securities of the employer corporation (within the meaning of section
402(a)(3)) and cash (not in excess of $200) in lieu of fractional
shares.''
Pub. L. 102-318, Sec. 521(b)(38), struck out par. (4) which defined
``qualified total distribution'' and provided special rule for
accumulated deductible employee contributions in determining qualified
total distribution.
Subsecs. (e), (f). Pub. L. 102-318, Sec. 522(b)(1), redesignated
subsecs. (d) and (e) as (e) and (f), respectively.
1988--Subsec. (d)(13). Pub. L. 100-647, Sec. 1012(bb)(2)(C),
substituted ``United States or its possessions'' for ``United States''
in heading.
Subsec. (d)(13)(A). Pub. L. 100-647, Sec. 1012(bb)(2)(A),
substituted ``the United States and any possession of the United
States'' for ``the United States''.
Subsec. (d)(13)(B)(i). Pub. L. 100-647, Sec. 1012(bb)(2)(B), amended
cl. (i) generally, substituting ``or a resident alien of the United
States'' for ``who is a bona fide resident of a foreign country''.
1986--Subsec. (d)(1)(B). Pub. L. 99-514, Sec. 1102(e)(1), inserted
last sentence for ``For purposes of clause (ii), any distribution or
payment from or under an individual retirement plan shall be treated as
includible in gross income.''
Subsec. (d)(1)(B)(iii), (iv). Pub. L. 99-514, Sec. 1875(c)(10),
reenacted cl. (iii) relating to amounts subject to withholding under
subchapter A of chapter 3 as cl. (iii) and reenacted cl. (iii) relating
to distribution described in section 404(k)(2) as cl. (iv).
Subsec. (d)(13). Pub. L. 99-514, Sec. 1234(b)(1), added par. (13).
1984--Subsec. (b)(2)(C). Pub. L. 98-369, Sec. 714(j)(1), substituted
``nonperiodic distribution'' for ``distribution described in
subparagraph (B)'' and ``subparagraph (A) or (B) (as the case may be)
shall be applied by taking into account'' for ``the Secretary, in
prescribing tables or procedures under paragraph (1), shall take into
account'', designated phrase ``which is made by reason of a
participant's death'' as cl. (i) and added cl. (ii).
Subsec. (d)(1)(B)(iii). Pub. L. 98-369, Sec. 714(j)(4), added cl.
(iii) relating to amounts subject to withholding under subchapter A of
chapter 3.
Pub. L. 98-369, Sec. 542(c), added cl. (iii) relating to
distributions described in section 404(k)(2). Directory language that
section (d)(1)(B) be amended by striking out ``and'' at end of cl. (i)
and substituting ``, or'' for the period at end of cl. (ii) could not be
executed in view of prior amendment by section 714(j)(4) of Pub. L. 98-
369, which struck out ``and'' at end of cl. (i) and substituted ``,
and'' for the period at end of cl. (ii).
Subsec. (d)(8). Pub. L. 98-369, Sec. 714(j)(5), freed from
withholding requirement any designated distribution which consists only
of employer securities of the employer corporation (within the meaning
of section 402(a)(3)) and cash (not in excess of $200) in lieu of
fractional shares.
Subsec. (d)(12). Pub. L. 98-369, Sec. 722(h)(4), added par. (12).
Effective and Termination Dates of 2001 Amendment
Amendment by Pub. L. 107-16 applicable to distributions after Dec.
31, 2001, see section 641(f)(1) of Pub. L. 107-16, set out as a note
under section 402 of this title.
Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or
limitation years beginning after Dec. 31, 2010, and the Internal Revenue
Code of 1986 to be applied and administered to such years as if such
amendment had never been enacted, see section 901 of Pub. L. 107-16, set
out as a note under section 1 of this title.
Effective Date of 2000 Amendment
Amendment by Pub. L. 106-554 effective as if included in the
provisions of the Taxpayer Relief Act of 1997, Pub. L. 105-34, to which
such amendment relates, see section 1(a)(7) [title III, Sec. 314(g)] of
Pub. L. 106-554, set out as a note under section 56 of this title.
Effective Date of 1992 Amendment
Amendment by section 521(b)(36)-(40) of Pub. L. 102-318 applicable
to distributions after Dec. 31, 1992, see section 521(e) of Pub. L. 102-
318, set out as a note under section 402 of this title.
Amendment by section 522(b)(1)-(2)(C) of Pub. L. 102-318 applicable,
except as otherwise provided, to distributions after Dec. 31, 1992, see
section 522(d) of Pub. L. 102-318, set out as a note under section 401
of this title.
Effective Date of 1988 Amendment
Section 1012(bb)(2)(D) of Pub. L. 100-647 provided that: ``The
amendments made by this paragraph [amending this section] shall apply to
distributions made after the date of the enactment of this Act [Nov. 10,
1988].''
Effective Date of 1986 Amendment
Amendment by section 1102(e)(1) of Pub. L. 99-514 applicable to
contributions and distributions for taxable years beginning after Dec.
31, 1986, see section 1102(g) of Pub. L. 99-514, set out as a note under
section 219 of this title.
Section 1234(b)(2) of Pub. L. 99-514 provided that: ``The amendment
made by this subsection [amending this section] shall apply to payments
after December 31, 1986.''
Amendment by section 1875(c)(10) of Pub. L. 99-514 effective, except
as otherwise provided, as if included in the provisions of the Tax
Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment
relates, see section 1881 of Pub. L. 99-514, set out as a note under
section 48 of this title.
Effective Date of 1984 Amendment
Amendment by section 542(c) of Pub. L. 98-369 applicable to taxable
years beginning after July 18, 1984, see section 542(d) of Pub. L. 98-
369, set out as a note under section 404 of this title.
Amendment by section 714(j)(1), (4), (5) of Pub. L. 98-369 effective
as if included in the provision of the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. 97-248, to which such amendment
relates, see section 715 of Pub. L. 98-369, set out as a note under
section 31 of this title.
Amendment by section 722(h)(4)(A) of Pub. L. 98-369 applicable to
payments or distributions after Dec. 31, 1984, unless the payor elects
to have such amendment apply to payments or distributions before Jan. 1,
1985, see section 722(h)(5)(B) of Pub. L. 98-369, set out as a note
under section 643 of this title.
Effective Date
Section 334(e) of Pub. L. 97-248, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
``(1) Amendment made by subsections (a) and (d).--Except as provided
in paragraph (4), the amendment made by subsections (a) [enacting this
section] and (d) [amending section 3402 of this title] shall apply to
payments or other distributions made after December 31, 1982.
``(2) Amendments made by subsection (b).--Except as provided in
paragraph (4), the amendments made by subsection (b) [amending section
6047 of this title] shall take effect on January 1, 1983.
``(3) Amendments made by subsection (c).--The amendments made by
subsection (c) [enacting section 6704 of this title] shall take effect
on January 1, 1985.
``(4) Periodic payments beginning before january 1, 1983.--For
purposes of section 3405(a) of the Internal Revenue Code of 1986
[formerly I.R.C. 1954], in the case of periodic payments beginning
before January 1, 1983, the first periodic payment after December 31,
1982, shall be treated as the first such periodic payment.
``(5) Delay in application.--The Secretary of the Treasury shall
prescribe such regulations which delay (but not beyond June 30, 1983)
the application of some or all of the amendments made by this section
with respect to any payor until such time as such payor is able to
comply without undue hardship with the requirements of such provisions.
``(6) Waiver of penalty.--No penalty shall be assessed under section
6672 with respect to any failure to withhold as required by the
amendments made by this section if such failure was before July 1, 1983,
and if the person made a good faith effort to comply with such
withholding requirements.''
Plan Amendments Not Required Until January 1, 1994
For provisions directing that if any amendments made by subtitle B
[Secs. 521-523] of title V of Pub. L. 102-318 require an amendment to
any plan, such plan amendment shall not be required to be made before
the first plan year beginning on or after Jan. 1, 1994, see section 523
of Pub. L. 102-318, set out as a note under section 401 of this title.
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan,
such plan amendment shall not be required to be made before the first
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub.
L. 99-514, as amended, set out as a note under section 401 of this
title.
Section Referred to in Other Sections
This section is referred to in sections 3402, 5891, 6047, 6652 of
this title; title 5 section 8348.
