The IRS has issued two pieces of guidance affecting qualified plan distributions to state unclaimed property funds. One addresses the withholding and reporting obligations when a distribution is made to an unclaimed property fund. The other makes it easier for individuals who collect their benefit from a state unclaimed property fund to roll over their benefits.
Revenue Ruling 2020-24 describes a situation in which a pre-tax qualified retirement plan benefit is paid to a state’s unclaimed property fund. (The ruling does not address the propriety of that distribution under state law or ERISA.) The ruling observes that the payor or plan administrator of a designated distribution, including a distribution from a qualified retirement plan, must withhold federal income tax unless an exception applies. Since no exception applied based on the facts presented, and it was not reasonable to believe that the distribution was not includible in gross income, the payment was subject to federal income tax withholding. Moreover, because the distribution exceeded the $10 reporting threshold for Form 1099-R, the plan administrator was required to report the designated distribution in Box 1, and the federal income tax withheld in box 4, of Form 1099-R. Transition relief in the ruling indicates that payors and plan administrators who do not meet the withholding and reporting requirements described in the ruling will not be treated as failing to comply with respect to payments made before January 1, 2022, or the date it becomes “reasonably practicable” for them to comply.
Revenue Procedure 2020-46 modifies and updates Revenue Procedure 2016-47 (see our Checkpoint article), which allows plan administrators (and IRA providers) to accept late 60-day rollovers from individuals who self-certify that they qualify for a waiver of the 60-day requirement. Certifications under the original procedure were permitted only for 11 specified reasons, including errors by a financial institution, postal errors, severe damage to the individual’s principal residence, and serious illness. Revenue Procedure 2020-46 adds a 12th item, allowing self-certification if the rollable distribution from a qualified plan or IRA was made to a state’s unclaimed property fund. The updated revenue procedure also adds a provision explaining that self-certification under the procedure applies only for purposes of obtaining a waiver of the 60-day requirement; it does not waive any other possible obstacles to a valid rollover. So, for example, it does not allow the rollover of a distribution that is a required minimum distribution, nor does it allow rollover if the individual is a nonspouse beneficiary. The model certification that accompanied the original guidance has also been updated to reflect the new reason for waiver.
EBIA Comment: Distributions to state unclaimed property funds are disfavored and uncommon, but sometimes—as in the case of a terminating plan—difficult to avoid. (In the case of a terminating plan, the preferred approach would be to deposit the funds in an IRA established on behalf of the missing or unresponsive participant or beneficiary in accordance with the DOL’s regulatory safe harbor.) The revenue ruling clarifies that the usual withholding and reporting obligations apply to these distributions, even though the very factors that created the need to distribute to an unclaimed property fund may complicate compliance. But the revenue procedure provides some good news, making it easier for participants to roll over benefits received from unclaimed property funds. For more information, see EBIA’s 401(k) Plans manual at Sections III.F.4 (“Escheat and Unclaimed Property Laws”) and XXXIII.H.4 (“The Problem of Missing and Unresponsive Participants”).
Contributing Editors: EBIA Staff.