We have a client, age 68, who has $1,000,000 + in his PS balance. Approximately $950,000 of this balance is from a rollover.

The client takes random taxable distributions each year from his PS balance, usually amounting to around $50,000 to $75,000 yearly.

His plan is held with a brokerage firm and they process his distributions. The brokerage firm has never withheld 20% Federal tax or 4% required state tax from these distributions. The broker says it is optional for the client, and the client always says no tax.

Even though these distributions are coming from Rollover money inside a PS plan, are they not still subject to the mandatory 20% Federal tax?

Withdrawals from a qualified plan which are eligible for a rollover are subject to 20% withholding. Reg. 1.3405©-1 Q 2. However it is the responsibility of the Plan administrator to withhold. Q-4 .If the brokerage is not the plan admin then the Plan admin is liable for the penalty for the failure to withhold. Q-7.

I agree with mbozek. Withholding is never optional for distributions that are rollover eligible… with reference to the responsibility for withholding…there are some instances where the Brokerage firm would be responsible for the tax withholding even if the plan administrator is another party... For instance, if the plan document allows the employer to assign such responsibility to the brokerage firm---in this case, the brokerage firm would also handle the 1099-R and 945 reporting. This generally occurs with a prototype document...Notwithstanding, the said document may include a caveat where the withholding and tax reporting could be the responsibility of the plan administrator. You need to:

1. Find out from the brokerage firm why no withholding was performed
2. Check the plan document
3. Verify the elections made by the employer in the adoption agreement.

4. Tell the plan sponsor.
5. Make sure done correctly in the future.