When Connecticut enacted legislation in 2017 to become a mandatory withholding state, effective January 1, 2018, for Connecticut residents receiving pension, 401(k), IRA or annuity distributions, few would have imagined the difficulty residents and payers would have understanding the new rules, including how the exception from withholding would apply for rollover distributions. Nor would many have predicted the difficulties Connecticut residents would have with completing the Form CT-W4P, which attempted to mirror the wage withholding rules. Yet, in both areas, the new Connecticut law has proven to be quite a challenge to sort out and administer. Why all the difficulties?
For starters, the Connecticut law, which requires mandatory withholding at the rate of 6.99% for all lump-sum distributions where the distribution is not entirely rolled over, did not clearly address how non-periodic, non-lump-sum distributions, such as one-time hardship distributions or other types of non-periodic distributions of less than the entire account balance, should be handled. Applying wage withholding tables to these payments would not make much sense, nor would the automatic withholding of 6.99% seem to be equitable for persons whose Connecticut income tax bracket was lower than 6.99%, especially in the case of a hardship distribution for which the person needs to use every penny of the distribution to go toward the hardship expense itself. And for persons who failed to submit a new CT-W4P to the payer, the law appeared to require that the mandatory withholding automatically default to the maximum, 6.99% rate.
To address these issues, the Connecticut Department of Revenue Services (DRS) has revised the Form CT-W4P (the current revised form has a 01/18 revision date in the top left corner of the form) to allow for all recipients of non-regularly scheduled (for example, distributions other than monthly) retirement distributions, in lieu of the 6.99% withholding, either to elect $0 withholding (by using Code E on the form) or by electing a fixed dollar amount of withholding. Neither of these approaches was available on the prior version of the CT-W4P which had a 10/17 revision date in the top left corner of the form. Given the prevalence of hardship and other distributions of less than the entire account balance, the DRS revisions to the Form CT-W4P do provide some helpful clarity and relief to Connecticut residents and payers who must comply with CT’s mandatory withholding requirements that are set forth in Connecticut General Statutes § 12-705(a)(2). Note that as was the case with the prior Form CT W4P, if a Connecticut resident does not return a completed form, then the payer will withhold at 6.99%.