IRS Issues Guidance About Retirement Plan Accounts Transferred to Unclaimed Property Funds

A revenue ruling addresses income tax withholding and reporting, and a revenue procedure adds to the list of waivers of the 60-day rollover requirement.

The IRS has issued two pieces of guidance related to the transfer of retirement plan accounts to state unclaimed property funds.

In Revenue Ruling (Rev. Rul.) 2020-24, “Withholding and Reporting With Respect to Payments From Qualified Plans to State Unclaimed Property Funds,” the IRS notes that Section 3405 of the Internal Revenue Code (IRC) provides federal income tax withholding rules with respect to designated distributions. Because none of the statutory exceptions from treatment as a designated distribution in Section 3405 apply to the payment of an individual’s accrued benefit from a qualified plan, the payment, including the amount withheld, is a designated distribution and is subject to federal income tax withholding, the IRS says.

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The payment of an individual’s accrued benefit from a plan, including both the amount sent to a state unclaimed property fund and the amount withheld, is a designated distribution under Section 3405(e)(1) that exceeds the reporting threshold. This means the employer is required to report that designated distribution in Box 1, and the federal income tax withheld in Box 4, of the Form 1099-R for 2020.

“A person will not be treated as failing to comply with the withholding and reporting requirements described in this revenue ruling with respect to payments made before the earlier of January 1, 2022, or the date it becomes reasonably practicable for the person to comply with those requirements,” the IRS says.

In Revenue Procedure (Rev. Pro.) 2020-46, the IRS modifies the list of permissible reasons for self-certification of eligibility for a waiver of the 60-day rollover requirement set forth in Revenue Procedure 2016-47 by adding “the distribution was made to a state unclaimed property fund.”

The IRS says a self-certification under Rev. Pro. 2020-46 applies only for the purposes of a waiver of the 60-day requirement for a valid rollover; it does not apply for purposes of any other requirement for a valid rollover. “For example, a taxpayer may not roll over a distribution if it is a required minimum distribution [RMD] or if the taxpayer is a non-spouse beneficiary. In addition, in the case of a distribution from an IRA [individual retirement account], (i) a rollover to another IRA is not permitted if the taxpayer has made an IRA rollover of another IRA distribution made in the prior 1-year period, and (ii) any rollover must consist of the same property distributed (for example, if shares of a company are distributed from an IRA, some or all of the shares may be rolled over, but no proceeds from the sale of those shares can be rolled over),” the guidance states.

Rev. Proc. 2020-46 is effective as of October 16.

The Department of Labor (DOL) has been engaged in enforcement actions related to these issues even though the agency and the IRS have not issued comprehensive guidance on missing participants that provide a clear road map for compliance. The ERISA Advisory Council issued a report to Secretary of Labor Eugene Scalia on transferring amounts from uncashed checks from retirement plans to state unclaimed property programs.