Apparently, the IRS has allowed the pension issuing banks to use the same withholding tables as they do for W2 wages. As a result, the banks send out pension checks with reduced withholding starting April 1st.
“The IRS issued Publication 15-T, regarding the new withholding tables designed to accelerate the benefit of the “Making Work Pay” tax credit passed under the American Recovery and Reinvestment Act of 2009, effective February 17, 2009. The Publication formalized the IRS position that the new withholding tables are to apply to pensions in addition to wages. Governmental plans should be aware of the impact of the new tables on two separate groups: (1) employees receiving wages under the plan’s payroll, and (2) retirees and/or their beneficiaries receiving monthly benefit payments from the plan.”
But, this reduction does not apply to pensions as far as the tax law goes, as indicated by the following excerpt:
Excerpt: “The Internal Revenue Service (IRS) has confirmed that the newly released withholding tables that incorporate the Making Work Pay credit included in the economic stimulus law apply to pensions. Marge Martin, Vice President, Aon Consulting, pointed out that pension payments are not eligible for the Making Work Pay credit, so the withholding reduction on the distributions could lead to underpayment penalties when filing 2009 taxes. Aon has told plan administrators they may want to add a warning about the potential consequences of the new pension withholding threshold when changing notices.”
This could lead to underpayment of taxes during the year if one receives pension checks with this reduced withholding.
