“However, there is a Code in the same section of the form for reporting individuals previously reported who have since withdrawn their account balance. Should we be reporting people who fall into this category? What are the consequences if we fail to report such individuals?”
Michael A. Webb, vice president, Cammack Retirement Group, answers:
This is an excellent observation; great to see that you take the time to review the annual forms that you file! There is no Internal Revenue Service (IRS) requirement to report individuals who no longer maintain a vested balance in your 403(b) plan due to having received a distribution, but you may save quite a headache for those who are administering the plan 20 to 30 years from now if you do take the time to report such individuals.
To understand why this is the case, a review of why Form 8955-SSA information is reported in the first place is in order. As detailed in a past Ask the Experts column (see “(b)lines Ask the Experts – Form 8955-SSA Data from Vendors”), Form 8955-SSA information is reported by the IRS to the Social Security Administration (SSA), which stores the information and uses it to notify individuals of the possible existence of a retirement benefit from the 403(b) plan that you sponsor when they reach retirement age. Of course, it is possible, even likely, that the individual withdrew his benefit between the time he/she was reported on Form 8955-SSA and the time of retirement many years later. However this may not be clear from the notification the participant receives from the SSA, and the participant may then firmly believe he/she is entitled to a benefit from your organization, and it is then up to the organization to disprove this claim. Often, it becomes an arduous exercise to research such a claim, since the employee may have terminated employment with your organization decades ago (see “Decades-Old DB Benefit Payments Being Questioned”).
In order for the plan sponsor to avoid the need to research decades-old claims, an alternative would be to take advantage of the voluntary reporting on Form-SSA for previously reported individuals who no longer maintain vested account balances with the plan due to distribution. Such reporting does require a bit of effort each year, but it will most certainly reduce the number of future claims of employees seeking to be provided with a retirement benefit that does not exist.
Thank you for your question!
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.