2018 Tax Withholding Rates for Nonqualified Retirement Plans
The Tax Cuts and Jobs Act was signed into law on December 22, 2017. Provisions of the law change tax withholding rates and income tax brackets which affect lump sum payments from nonqualified retirement plans starting in 2018. These changes affect all co-op-sponsored nonqualified deferred compensation plans.
Further, IRS guidance states that employers should begin applying the 2018 withholding tables as soon as possible but no later than February 15, 2018. Co-ops should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.
For co-ops sponsoring any nonqualified deferred compensation plan(s) — As the plan administrator, each co-op is responsible for reviewing 2018 federal and state tax withholding rates (and related guidance) and taking the appropriate steps to ensure the proper amounts are being withheld from nonqualified plan payments.
Lump sum payments to current or former co-op employees under nonqualified plans generally are taxable as supplemental wages, which are subject to new withholding rates. Nonqualified annuity payments are frequently treated as regular wages and would not be impacted by this change. The chart below shows the supplemental withholding rates (as reflected in IRS Notice 1036).
| Federal Supplemental Wages Tax Withholding | 2017 Rates | 2018 Rates |
| Default withholding rate on supplemental wages where total supplemental wages for the year do not exceed $1M | 25% |
22% |
| Default withholding rate on supplemental wages to the extent total supplemental wages for the year exceed $1M | 39.6% |
37% |
NOTES: See section 7 of IRS Publication 15, Employer’s Tax Guide for the definition of supplemental wages. Nonqualified deferred compensation plans include: Executive Benefit Restoration Plans, Executive Compensation 457(b) Plans, Global Executive Compensation Plans, Governmental Deferred Compensation 457(b) Plans, Performance Incentive 457(f) Plans, Pension Restoration Plan and Top Hat Plans.
The IRS is working to update its withholding tax calculator by end of February and to revise Form W-4. All taxpayers are encouraged to check their withholding once the new tools are available.
Additionally, nonqualified plan distributions for directors’ plans are subject to IRS Form 1099-MISC reporting and are also subject to income tax and self-employment tax at the time of distribution.
For the latest information about developments related to 2018 tax updates, such as legislation enacted after it was published, go to irs.gov to review Notice 1036, Pub. 15 (Circular E), Employer’s Tax Guide (for use in 2018). The IRS also provides answers for 2018 Withholding Tables Frequently Asked Questions.