Net Plan Lump Sum Tax Supplement Payment

Transcription

1 Content Frequently Asked Questions Net Plan Lump Sum Tax Supplement Payment (for U.S. Citizens and U.S. Residents in the Net Pension Plan receiving lump sum retirement payments upon separation) A. Description of the Tax Supplement and Eligibility for Payment B. Computation of the Tax Supplement C. IRA Rollover and Tax Planning D. Tax Consequences of Receiving a Tax Supplement E. Lump Sum Death Benefits Paid to Beneficiaries who are U.S. Tax Residents F. Additional Resources A. Description of the Tax Supplement and Eligibility for Payment 1. Who should read this? This document answers questions that apply to U.S. citizens, or non-u.s. citizens who are U.S. residents for income tax purposes, who will receive lump sum benefits from the Net Plan of the Staff Retirement Plan ( SRP ) upon separation from the Bank Group. If you are not a U.S. citizen and if you are unsure whether or not you are a U.S. tax resident, please refer to the following fact sheets on the SRP Pension Administration web site: US Income Tax and the SRP - Net Plan and US Tax Status of a Non-US National. For more detailed information on U.S. tax residency, please refer to IRS Publication 519, available at 2. What is a tax supplement and why does the Bank pay it? SRP benefits received by U.S. citizens or by U.S. tax residents are subject to U.S. and state and local income taxes. Since SRP Net Plan benefits are intended as net of tax benefits and calculated in reference to net salaries, a tax supplement will be paid to you as reasonable compensation for the taxes that you will eventually pay on the taxable portion of your lump sum benefit. Additionally, the tax supplement will compensate you for the taxes, if any, due on the tax supplement itself. 3. What SRP Net Plan benefits are covered by the tax supplement? The tax supplement will only be paid on taxable benefits from the Defined Benefit, Cash Balance and Termination Grant components of the SRP Net Plan; no tax supplement will be paid on benefits paid from the SRP Gross Plan, the Optional Savings Plan for Country Office staff, or the Bank Group 401(k) Plan. The tax supplement will cover benefits paid from the Supplemental Staff Retirement Plan ( SSRP ), and there is a separate set of FAQs concerning the tax supplement on SSRP benefits. 4. How do I apply for the Lump Sum Tax Supplement? For U.S. citizens upon separation. If you are a U.S. citizen, the Tax Office will use information on your Tax Allowance Certificate (Form 70) to process your tax supplement. Please make sure your Form 70 for the current year is submitted and updated, and that your Form 70s for previous years are confirmed. Your Lump Sum SRP tax supplement will be processed only when your Form 70 is current. You need not submit the Lump Sum tax supplement application (or any other form). Page 1 of 6 As of February 2016

2 For non-u.s. citizens upon separation. If you are not a U.S. citizen but a U.S. tax resident, please complete the Lump Sum Benefit Tax Supplement Application form available on the intranet via the Tax Portal ( 5. When will I receive my tax supplement? If you are a U.S. citizen with a current Form 70 or a non-u.s. citizen who has already submitted a Lump Sum Benefit Tax Supplement Application, the Lump Sum tax supplement is usually processed within one to two months after the lump sum distribution is paid by the SRP. B. Computation of the Tax Supplement 1. How is the tax supplement calculated? Your tax supplement may be more or less than your actual tax liability depending on whether you rollover the taxable portion of your lump sum into a traditional IRA, and the amount of your actual total income during retirement. Please note that Staff Rule 6.04, which governs the calculation of tax allowances for active staff, does not apply to the calculation of tax supplements. Because you are eligible to roll over the taxable amount of your lump sum payment to a traditional Individual Retirement Account (IRA), the calculation methodology assumes that you: (1) Will elect to rollover that amount into a traditional IRA, and thereby defer taxation until your retirement years and (2) Withdraw amounts from the IRA during retirement over a period of years, thereby spreading out your tax liability as amounts are withdrawn. The calculation assumes that you will have a certain level of total annual retirement income, referred to as a Target Replacement Income (TRI), and that your lump sum will be taxed at the same average tax rate that would apply to your TRI. This is how it works: upon termination, a TRI equal to 70 percent of your final annual net salary is calculated. The TRI is then reduced slightly, because a portion of your lump sum is non-taxable. The reduction is equal to the amount that would be paid to you in a single year if the nontaxable amount were converted into a life annuity. Federal, state, and local income taxes are calculated on an adjusted gross income equal to the TRI, and using single filing status with one personal exemption and the average deductions for an income level of the TRI. This calculation provides the amount of tax that can be expressed as a percentage of the TRI. This percentage is an effective or average tax rate. The first tax supplement component is the amount calculated by multiplying the effective tax rate by the taxable portion of the SRP lump sum benefit. Since U.S. citizens are subject to income tax on the tax supplement itself, they receive a second component of the tax supplement, which is calculated as the tax allowance on the first component. This tax on tax will be calculated and paid to you as part of the tax allowance paid on your salary and other employment income. 2. If I defer receipt of my SRP lump sum benefit until well after my separation from the Bank Group, and while I am a U.S. tax resident, how will this affect the tax supplement calculation? If you receive your SRP lump sum benefit in the calendar year of your separation from the Bank Group or in the calendar year immediately following your separation, your tax supplement will be calculated in the same way as described in Q&A B-1 above. Page 2 of 6 As of February 2016

3 If you receive the lump sum benefit during or after the second calendar year following the calendar year of your separation, your lump sum tax supplement for U.S. taxes will be calculated as follows: Your target replacement income (TRI) as described in Q&A B-1, above, will be adjusted for inflation. Your TRI will then be grossed up for taxes. The grossed up TRI will include federal, state and local income taxes (and tax on tax) based on your place of residence as of the date you receive the deferred lump sum payment, and the calculation will assume a single filing status, one exemption, and the average deductions for an adjusted gross income equal to your grossed up TRI. The amount by which your grossed up TRI exceeds your TRI will be expressed as a percentage of your TRI. This percentage is the gross up percentage. The gross up percentage will be applied to the taxable amount of your lump sum, and the resulting amount will be your lump sum tax supplement, which includes the tax on tax. 3. After I receive a tax supplement, can I request an additional safety net payment? No. Unlike the tax allowance system for salaries, there is no safety net process in the case of a tax supplement paid to a U.S. citizen or tax resident. Since the calculation is based only on data such as your final net salary, your state of residence and the taxable amount of your lump sum payment, there is no need for a recalculation based on actual data from your filed tax return. The tax supplement for a SRP lump sum payment is the single and final payment from the Bank Group to compensate you for all present and future U.S. income tax liabilities on your SRP lump sum. C. IRA Rollover and Tax Planning 1. Why does the tax supplement calculation assume that I will roll over the taxable portion of the SRP lump sum into a traditional IRA? The calculation of the tax supplement assumes tax-efficient behavior. The purpose of the SRP benefit is to provide you with a retirement benefit. By transferring or rolling over the taxable portion of the SRP benefit to a traditional IRA, you can set these funds aside for retirement while deferring all tax on the benefit until retirement. You can invest your IRA assets as you choose, and taxes on investment earnings within the IRA will be deferred as well. You will only be taxed on amounts that you withdraw from the IRA in retirement, as they are withdrawn. This allows you to spread the taxation of your benefit over multiple years, and avoid the higher rates of taxation that may apply if the entire lump sum is taxed in a single year, or in a year when you also receive employment income. 2. If I rollover the entire taxable portion of my SRP lump sum into an IRA and pay no income tax on the lump sum in the year I receive it, will I still receive a tax supplement? Yes, you will still receive a tax supplement, and it will not be reduced on account of your deferral of tax by rolling over the taxable amount of the lump sum into an IRA. This is because the tax supplement is intended to compensate you for your future tax liabilities when the amounts are withdrawn from the IRA gradually during your retirement. While it would be wise to save and invest the tax supplement to cover future taxes or retirement expenses, what you do with both the tax supplement and the non-taxable portion of the SRP lump sum benefit is entirely up to you. 3. What happens if I decide not to rollover the taxable lump sum benefit into an IRA? Will I receive more tax supplement and will the Bank reimburse possible tax penalties? As mentioned above, the tax supplement calculation assumes that you will rollover the taxable portion of the benefit into a traditional IRA. Your tax supplement will not increase if you choose instead to pay higher taxes by subjecting the entire taxable amount of your lump sum to income tax in the year you receive the lump sum. Moreover, under U.S. tax law, if you terminate Bank Group employment before the calendar year in which you reach age 55 and receive a lump sum SRP payment before you reach age Page 3 of 6 As of February 2016

4 59½, you may have to pay an additional 10% tax on any part of the taxable benefit that you do not roll over into an IRA, or another tax deferred vehicle. The tax supplement will not cover any tax penalty you may incur. Please consult IRS Publication 575 for more detailed guidance and exceptions. 4. Where can I receive additional information about how to rollover my taxable benefit into an IRA? The Pension Administration unit provides more detailed information about IRA rollover and alternatives to rollover, like direct transfer of the lump sum to an IRA, on its website. Pension Administration also furnishes legally required rollover and direct transfer notices to U.S. citizens and tax residents when they apply for SRP benefits upon separation from the Bank Group. Note: IRA rollovers must generally be made within 60 days after receipt of the SRP lump sum payment. 5. What if I rollover my taxable SRP lump sum into a Roth IRA? Your tax supplement will not change or increase if you rollover your SRP lump sum into a Roth IRA instead of a traditional IRA. Rollover of your taxable lump sum into a Roth IRA will not defer tax and will likely maximize your taxes in the short term. A rollover to a Roth IRA would require you to pay income tax on the entire taxable amount in the year you receive the lump sum, when you will likely be subject to higher tax rates. For more information about Roth IRAs, you should review IRS Publication 590 or consult with a professional tax adviser. D. Tax Consequences of Receiving a Tax Supplement 1. Is the lump sum tax supplement payable to U.S. tax residents subject to U.S. income taxes? If you are a U.S. citizen when you separate from the Bank Group, your lump sum tax supplement will be subject to income taxes in the year it is paid to you. If you are not a U.S. citizen when you separate from the Bank Group, your lump sum tax supplement will generally be treated as non-taxable unless you defer receipt of your SRP lump sum payment until well after your separation from the Bank Group and while you are a U.S. tax resident. If your lump sum tax supplement is taxable, it will be calculated using a method that takes into account the tax on the SRP lump sum benefit as well as the tax on the tax supplement itself (see Q&A B-1 above). 2. Can I rollover the tax supplement to defer taxes? The tax supplement is not a distribution from the SRP and unlike the lump withdrawal benefit you cannot defer tax on your tax supplement payment by rolling it over to an Individual Retirement Account (IRA). 3. Will my tax supplement, if taxable, be reported to the federal and state tax authorities? If you are a U.S. citizen, and you receive your SRP lump sum benefit in the calendar year of your separation from the Bank Group or in the following calendar year, your tax supplement payment will be reported to federal and state tax authorities as part of Box 1 of your Form W-2, wages, tips and other compensation. If you are a U.S. citizen or U.S. tax resident, and receive the lump sum benefit after the calendar year following the calendar year of your separation, your tax supplement will be reported to federal and state taxing authorities on Form 1099-MISC. Page 4 of 6 As of February 2016

5 4. Is my tax supplement payment subject to Self Employment (SE) tax? If you were a U.S. citizen while working within the U.S. at any time during your Bank Group employment, at least a portion of your tax supplement payment will be subject to SE tax and should be reported on IRS Form 1040, Schedule SE Line 2, along with other income subject to SE tax. This SE tax liability is calculated and paid as part of your final tax allowance, and will be reflected on your tax allowance statement. If you were not a U.S. citizen at any time during the period of your Bank Group staff employment, no portion of your tax supplement payment or your SRP lump sum payment will be subject to SE tax. Your SRP lump sum benefit is not subject to SE tax and will be reported separately on IRS Form 1099-R, issued by Pension Administration. If you have any questions regarding Form 1099-R, please contact Pension Administration at 1pension@worldbank.org or E. Lump Sum Death Benefits Paid to Beneficiaries who are U.S. Tax Residents. 1. I am a U.S. tax resident who has received a lump sum death benefit from the Net Plan. Am I eligible for a tax supplement? Yes, beneficiaries receiving SRP Net Plan death benefits and who are subject to income tax on those benefits are eligible for tax supplements. To receive a tax supplement, you will need to complete a Beneficiary Lump Sum Tax Form and submit it to the Tax Office. To request a copy of this form, please contact the Tax Office at taxoffice@worldbank.org. 2. How are lump sum tax supplements for beneficiaries who are U.S. tax residents calculated? The methodology for calculating the tax supplement paid to a beneficiary receiving a SRP lump sum payment will vary depending upon whether the tax supplement itself is taxable. If the deceased former staff member was not a U.S. citizen upon separation from the Bank Group, and if he or she separated from the Bank Group in the same tax year or in the tax year preceding when the lump sum was paid to the beneficiary, the lump sum tax supplement payable to the beneficiary will be treated as non-taxable, and will equal the first component of the tax supplement described in Q&A B-1, above, determined based on the beneficiary s place of residence. In all other cases, the beneficiary s lump sum tax supplement will be taxable, and it will be calculated as follows: The deceased former staff member s target replacement income (TRI) as described in Q&A B-1, above, will be used to calculate the tax supplement on the lump sum death benefit. The TRI will be adjusted for inflation if the deceased former staff member separated from the Bank Group before the tax year preceding the tax year when the lump sum is paid. The TRI (as adjusted, if applicable) will be grossed up for taxes. The grossed up TRI will include federal, state and local income taxes (and tax on tax) based on the beneficiary s place of residence as of the date the lump sum death benefit was paid, and the calculation will assume a single filing status, one exemption, and the average deductions for an adjusted gross income equal to the grossed up TRI. The amount by which the grossed up TRI exceeds the TRI will be expressed as a percentage of the TRI. This percentage is the gross up percentage. The gross up percentage will be applied to the taxable amount of the lump sum death benefit, and the resulting amount will be the tax supplement on the lump sum death benefit, which includes the tax on tax. Page 5 of 6 As of February 2016

6 3. I am a beneficiary receiving a lump sum death benefit from the SRP. Does the calculation assume that I will rollover my SRP benefit to an IRA? Yes, your tax supplement will be calculated based on the assumption that you will transfer or rollover your payment to an IRA or other tax qualified plan and thereby defer income taxes on the SRP lump sum. This will enable you to spread out the tax payments over a number of years. If you rollover the SRP benefit, the tax supplement will be paid to you soon after distribution even though you will have no income tax liability on the SRP benefit in the current year. However, the tax supplement itself may not be rolled over, and may be taxable in the year it is paid to you. See the questions and answers in parts C and D, above. Please note that if you are not a surviving spouse of the deceased former staff member, you will be subject to different rules on when you must withdraw amounts from the IRA. Please refer to IRS Publication 590, or consult with your personal tax adviser. F. Additional Resources 1. Where can I find tax supplement information and forms? Information concerning the tax supplement on Net Plan SRP benefits and tax supplement forms can be found in the tax supplement portion of the Bank Group s Tax Portal. 2. If I have additional questions whom do I contact? Please contact the Tax Office by to taxoffice@worldbank.org, or by phone at (202) The information provided above is for information purposes only it is not tax advice. U.S. tax law is subject to change, and tax consequences may vary depending upon your personal circumstances. If you have any questions about your own personal tax situation, you should consult with a professional tax advisor. Page 6 of 6 As of February 2016