District of Columbia Revises New Withholding Rule For Retirement Plan Distributions

The District of Columbia has revised its recent requirement regarding increased withholding from retirement plan distributions to D.C. residents, making this rule applicable only to lump sum distributions.  In our prior One Minute Memo dated January 27, 2012, we discussed a new D.C. law that required retirement plans to withhold taxes from distributions to D.C. residents at the highest D.C. individual tax rate (currently 8.95%).   A D.C. Council member sponsoring the revised law explained that the earlier legislation (adopted December 22, 2011) was always intended to apply only to lump sum distributions, not to annuity or other partial payments.  The rule applies to lump sum distributions from retirement plans (including 401(k), defined benefit, defined contribution, and 403(b) plans) and IRAs.

The new law clarifies that the requirement to withhold at the highest tax rate applies only to taxable distributions of the payee’s “entire account balance.”  The requirement does not apply to amounts that are not subject to federal tax withholding, such as rollovers or any portion of the distribution that constitutes after-tax distributions.  Distributions in any form other than a lump sum (annuities, installments, etc.) remain subject to withholding under the normal withholding rates.