MMC Benefits Handbook
How Benefits are Taxed
Your monthly benefit payments are taxed as ordinary income. Therefore, you will be sent tax withholding election form Substitute W-4P for the Qualified Plan in your commencement package. If you do not return the form, federal taxes will be withheld as if you are married with three withholding allowances. If you do not have sufficient taxes withheld, you may have to pay estimated taxes on a quarterly basis.
If you contributed to the Sedgwick Retirement Plan, the portion of your payment attributable to your employee contributions is not taxable.
Consult with a financial or tax professional for information about your personal tax situation.
You may change your tax withholding election at any time by completing a new IRS form W-4P. You may get a copy of the form at the IRS website.
Taxes on a Lump Sum
If you receive a lump sum distribution and don't roll it over, it is taxable as ordinary income.
In addition to any income taxes you may need to pay, your distribution could be subject to a 10% penalty tax unless you:
- receive the distribution on or after you reach age 59-1/2,
- leave the Company and receive the distribution on or after age 55,
- use the distribution for an IRS deductible medical expense to the extent you have medical expenses that exceed 7.5% of your adjusted gross income for the year,
- are disabled (as defined by the Internal Revenue Code), or
- are an alternate payee and receive a distribution pursuant to a Qualified Domestic Relations Order.
Lump sum payments are subject to a mandatory 20% federal tax withholding if not directly rolled over to the trustee or custodian of another eligible employer plan or IRA. Any taxable amount you roll over into a Roth IRA will be includible in your taxable income at the time it is paid from the Plan; however, mandatory withholding does not apply.
You can avoid a required 20% federal withholding and the 10% penalty if the check is made payable to the trustee or custodian of another eligible employer plan that accepts rollovers or an IRA.
If the distribution is paid directly to you, you can still roll over the distribution if you complete the rollover within 60 days of the date you receive the distribution. If you want to roll over the full amount of your distribution, the amount you received plus the 20% withholding amount, you can make up the 20% that was withheld amount from your own funds.
If your Spouse receives a lump sum distribution, he or she can defer taxes by electing a rollover to another eligible employer plan or IRA. Your nonspouse beneficiary (including a surviving Domestic Partner) can also defer taxes on any lump sum distribution by electing a rollover. However, your nonspouse beneficiary can only elect a rollover to an IRA.
If a non-spouse beneficiary (including a surviving Domestic Partner) elects a cash distribution rather than a rollover, the distribution is not subject to the 20% federal withholding. However, once the distribution is received, it cannot be subsequently rolled over.
See "Employees of Sedgwick on the Date of the Acquisition" for special rules that may apply if your lump sum includes after-tax contributions.
Tax laws are complicated and change often. Should you (or your Surviving Spouse, non-spouse beneficiary, Domestic Partner or alternate payee under a QDRO) become eligible to receive a lump sum distribution from the Plan, more detailed information will be provided at the time.
Reported Payments & Withholdings
Your monthly benefit payments and withholdings are reported on an IRS Form 1099R. The form is mailed to you no later than January 31st for the previous year.