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.

Trump Administration to Look at Pensions Transferred to PBGC

A memorandum issued by the president first orders three departments to review the situation for Delphi retirees, then orders a review of pensions currently trusteed by the PBGC.

President Donald Trump has ordered the secretary of the Treasury, the secretary of commerce and the secretary of labor, in consultation with the assistant to the president for trade and manufacturing policy, to review defined benefit (DB) pension plans currently trusteed by the Pension Benefit Guaranty Corporation (PGCG).

As Trump’s memorandum notes, after auto parts maker Delphi went bankrupt, thousands of salaried and non-unionized Delphi workers had their pension plan terminated and trusteeship was transferred to the PBGC. Benefits paid by the PBGC are subject to statutory limits, meaning some employees’ retirement benefits might have been reduced.

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Delphi workers’ unionized colleagues were able to keep their full pensions through a deal with General Motors. A group of salaried and non-unionized Delphi retirees who did not benefit from their unionized colleagues’ deal has spent the last decade in legal and financial limbo as the retirees challenged the termination of their pension plan in the federal courts. That litigation remains ongoing, and the 6th U.S. Circuit Court of Appeals recently affirmed a District Court’s decision granting summary judgment against the retirees.

The memorandum first orders the Treasury, Commerce and Labor Departments to review the Delphi matter and inform the president within 90 days of the date of the memo of any appropriate action that may be taken, consistent with applicable law, to address affected Delphi retirees’ lost pension benefits and to bring additional transparency to the decision to terminate the plan. “This review shall include an evaluation of the feasibility of enacting legislation and whether the plan may be restored to its pre-termination status under Section 1347 of Title 29, United States Code,” the document says. Title 29 of the United States Code is a code that outlines labor regulations in the United States.

Trump’s memo then ordered the three departments to review the pension plans presently held in trusteeship by the PBGC and inform him within 180 days of the date of the memorandum of any appropriate action that may be taken consistent with applicable law. “Actions may include proposing legislation that appropriately balances the interests of all those covered by the pension system—from retirees, workers, employers and unions, to plans and taxpayers—to address the insolvency of such plans and to maintain the future solvency of the PBGC’s Single-Employer and Multi-Employer Programs,” the memorandum states.

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