Archived Insight | November 11, 2020

IRS Addresses Plan Withholding on Payments to State Funds

Missing participants and beneficiaries raise many issues for sponsors of retirement plans. Following a reasonable search effort, ERISA allows private sector retirement plan sponsors to make voluntary transfers of distributions to state unclaimed property funds, if permitted by state law.

One uncertainty about that option has been the timing of taxes related to such transfers. New guidance from the IRS clarifies that the plan sponsor must withhold and forward taxes at the time a participant’s benefit is transferred to a state fund.

The IRS requires compliance with the guidance for payments made before January 1, 2022 or the date it becomes reasonably practicable for the plan to comply, whichever is earlier.

Plan Withholding on Payments to State Funds

60-day rollover period

Under the guidance, Rev. Rul. 2020-24, withholding and reporting are considered to occur at the time the plan distributed the payment to the state property fund. That means the 60-day rollover period also is considered to begin at that time, even though the participant does not have the distribution or does not even know about it.

In related guidance, Rev. Proc. 2020-46, the IRS added distributions from a state unclaimed property fund to the list of acceptable reasons for missing the 60-day rollover deadline. It also adds this situation to the list of permissible reasons for self-certification of eligibility for a waiver of the 60-day rollover requirement.

What the new guidance doesn’t address

The IRS notes that the new guidance does not address whether a plan’s payment to a state fund otherwise complies with applicable law, including issues under ERISA. While not so specified in the Rev. Rul., because it is within the jurisdiction of the Department of Labor, one the main issues is how the ERISA preemption rules interact with state unclaimed property fund rules.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.