On October 16, 2020, the IRS issued new guidance applicable to payments made to state unclaimed property funds.
The IRS provides that a payment from a qualified retirement plan to a state’s unclaimed property fund constitutes a designated distribution which is subject to federal income tax withholding and reporting requirements
In the example provided by the IRS, the employer is a plan administrator of a qualified retirement plan that does not include designated Roth accounts, employer securities, nondeductible employee contributions or accident or health plan benefits. The taxpayer is an individual with an accrued benefit in the plan with a value of $900 who did not make a withholding election. In 2020, the taxpayer’s accrued benefit was paid to the state’s unclaimed property fund.
Under the ruling, because none of the statutory exceptions from the treatment as a designated distribution apply (wages, a payment to a nonresident alien or corporation or dividends on employer securities), the payment and the amount withheld are a designated distribution and subject to federal income tax withholding. Additionally, because the amount is over the $10 reporting threshold, the distribution must be reported on Form 1099-R, with the distribution amount in Box 1 and the federal income tax withheld in Box 4.In a footnote, the IRS notes that the Ruling does not address whether the payment to the state’s unclaimed property fund otherwise complied with applicable law (including ERISA).
Transitional relief for compliance with the Ruling is provided for payments made before the earlier of January 1, 2022 or the date it becomes “reasonably practicable” to comply.
This guidance updates Revenue Procedure 2016-47, which contains a list of reasons for taxpayers to self-certify eligibility for a waiver of the 60-day rollover period for distributions to eligible retirement plans. The IRS adds a new reason to the list: distributions made to a state’s unclaimed property fund. Self-certification only relates to the reason for missing the 60-day deadline, and not to whether the distribution is otherwise eligible for a rollover.
To qualify for self-certification, the IRS cannot have previously denied relief for the rollover. The taxpayer may not roll over a distribution if it is a required minimum distribution or if the taxpayer is a non-spouse beneficiary. Further, for distributions from an IRA, a rollover to another IRA is not permitted if the taxpayer has made an IRA rollover of another IRA distribution in the previous year (with the exception of rollovers from traditional IRAs to Roth IRAs) and any rollover must consist of the same property distributed.
The Revenue Procedure is effective as of October 16, 2020.