During recent testimony before the Internal Revenue Service (IRS), the American Benefits Council (www.americanbenefitscouncil.org) recommended changes to proposed regulations on supplemental wage withholding requirements.

The proposed regulations state that, after 2004, an employee who receives more than $1 million in supplemental wages, such as bonuses and commissions, is subject to mandatory income tax withholding at the highest applicable income tax rate­currently 35 percent. (This rate applies to the amount in supplemental wages that exceeds $1 million.)

Melissa Davis Hartranft, senior legal counsel at Fidelity Investments, represented the council and discussed administrative challenges posed by the proposed regulations. For example, all employers would have to revise their payroll practices to identify, track, and withhold the appropriate amount of taxes on all supplemental wage payments.

Employers that don't comply with the new 35 percent mandatory rate may be liable for the missed withholding, in addition to reporting, withholding, and deposit penalties plus interest, according to Hartranft.

Hartranft recommended that the final regulations include a delayed effective date, permanent good-faith relief from reporting and withholding penalties, and a choice of safe harbor approaches for compliance pertaining to all supplemental wage payments over $1 million.