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.