The Internal Revenue Service (IRS) recently issued Rev. Rul. 2020-24 and Rev. Proc. 2020-46 to provide direction with respect to qualified plan distributions paid to a state unclaimed property fund (i.e., an escheatment of the amount to the state), which occurs most commonly for missing participants in a terminating plan with small balances. Specifically, the guidance addresses (i) the tax reporting and withholding treatment for such amounts, and (ii) whether, in the aftermath of such a transfer, an indirect rollover of the distribution may still be available to the participant later claiming the amounts.
The IRS rulings add to the collection of existing guidance on how qualified plans are to deal with the long-standing problem of missing participants. The Department of Labor (DOL) has, through its extensive investigations of plans, taken aggressive action to ensure that missing participants are located, and their benefits are paid to them in as many instances as possible. The new guidance should not be taken as undermining those efforts or suggesting that escheatment is appropriate under Title I of the Employee Retirement Income Security Act (ERISA), for which the DOL retains jurisdiction. Rather, the IRS is trying to provide some insight as to what the tax implications are if amounts are escheated and, in certain instances, later recovered.
Rev. Ruling 2020-24 – Taxation and Withholding
Rev. Rul. 2020-24 provides guidance regarding withholding requirements for situations when the plan transfers the participant’s accrued benefit to the state unclaimed property fund (e.g., a small balance in connection with a plan termination). Consistent with Rev. Rul. 2018-17 (guidance issued to individual retirement account (IRA) custodians who escheat amounts to a state), the ruling provides that plan sponsors must comply with general reporting and withholding requirements for distributions made from qualified retirement plans to those paid under state escheatment laws. Payments from a qualified plan that are subject to tax withholding under Code Section 3405 will be subject to federal income withholding (e.g., 20% mandatory withholding for amounts that constitute eligible rollover distributions) and the distribution must be reported on Form 1099-R in the year of payment to the state unclaimed property fund.
The revenue ruling does give plan sponsors a grace period to come into compliance. The IRS will apply these requirements only to payments made before the earlier of January 1, 2022, or “the date it becomes reasonably practicable for the person to comply.” The ruling does not address any other applicable law or how the IRS plans to oversee this requirement.
Rev. Proc. 2020-46 – Rollover Treatment after Escheatment
Historically, a taxpayer could elect to have a distribution paid from a qualified retirement plan rolled over as an eligible rollover distribution to another qualified plan or IRA only if an election was made within 60 days of the distribution date. Under Rev. Proc. 2016-47, however, the IRS loosened the stringent adherence to these timing requirements for certain rollover payments and allowed taxpayers who missed the 60-day window to request a waiver of the requirement by self-certifying that the deadline was missed. The guidance requires, among other things, that the participant assert a valid reason—a reason specifically provided for in Rev. Proc. 2016-47—for missing the window. To take advantage of the waiver request, the participant must (i) make a written certification to a plan administrator or IRA trustee that the failure to comply with the timing requirements for a proper eligible rollover distribution was caused by an appropriate reason; (ii) not have previously been denied a waiver request on the distribution; and (iii) ultimately make the rollover contribution to the designated qualified plan or IRA as soon as practicable following self-certification.
Rev. Proc. 2020-46 maintains the structure and requirements of Rev. Proc. 2016-47 but adds “distribution made to a state unclaimed property fund” to the list of reasons why a participant may be eligible for a conditional waiver of the 60-day rollover restriction. The IRS also provided an updated model self-certification form that participants may use, and on which the plan administrator can rely.
Plan sponsors should review their plan procedures to provide Form 1099-R reporting for escheatment (e.g., in connection with a plan termination) and make updates if needed to the self-certification form for a waiver of the 60-day rollover period. No action is needed for Form 1099-R reporting to the extent a plan does not provide for escheatment, or with respect to plan procedures that provide for missing participants’ benefits to be forfeited to the plan’s forfeiture account.