Can a participant take a total distribution without paying federal and state taxes even if they are not rolling it over? They want to pay the taxes at the end of the year.

Federal tax withholding is mandatory on eligible rollover distributions in excess of $200.00. In the states of which I am familiar, state tax withholding is optional. I suppose state wuthholding rules could vary from state to state.

Information on state tax withholding can be found at
http://www.cigna.com/retirement/sponsor/y2ksw_w.html

The regulations under IRC SEction 3405 mandate the 20 percent withholding on all rollover eligible distributions that are not directly transfered.

Further, if the plan chooses not to do the withholding, the plan may be exposed to a penalty for under withholding and underdepositing of taxes -

There are states which are "mandatory" withholding states, in that if there is federal withholding, there must be state withholding. That is subject to the nexus issue for the plan and trust.

New withholding requirement for North Carolina, effective January 1, 2001.

http://www.dor.state.nc.us/practitioner/in...es/pd-00-2.html

Is the 20% mandatory W/D rules clear with respect to installment payments? There are no exceptions for installments are there?

Mandatory 20% fed withholding taxes is required from all qualified plan distributions in excess of $200 except :

periodic payments for more than 10 years
after tax amounts
tax free rollovers
distributions which cannot be rolled over

States generally treat distributions as as wages subject to estimated withholding, e.g., 80% of taxable amount in NJ.

If a participant wants to avoid mandatory withholding why not do a tax free rollover to an IRA and then take the distribution. IRAs are subject only to estimated tax payments.

... but not all payments are eligible for rollover.