Distribution of Employer Retirement Plan Balance to State Unclaimed Property Fund is Subject to Tax Withholding and Information Reporting Requirements
Payments made to state unclaimed property funds of a participant’s benefit from a retirement plan are subject to federal income tax withholding and information reporting, the IRS has ruled in Revenue Ruling 2020-24.[1]
The ruling is based on the following facts:
Employer M is the plan administrator of Plan X, a qualified retirement plan under § 401(a) that does not include designated Roth accounts under § 402A, hold employer securities, or provide benefits described in § 104 (compensation for injuries or sickness) or § 105 (amounts received under accident and health plans). Individual C, a U.S. person under § 7701(a)(30)(A) with a calendar year taxable year, has an accrued benefit in Plan X with a value of $900, has not made a withholding election under § 3405 with respect to her benefit, and has no investment in the contract within the meaning of § 72 with respect to her benefit. In 2020, Individual C’s accrued benefit (net of any applicable withholding) is paid to the State J unclaimed property fund, a fund under which a claim for property may be made by an owner.[2]
The ruling concludes that no exception exists from the requirement that a designated distribution rules under IRC §3405(e)(1)(B) exists for such a transfer, taxes must be withheld by the plan pursuant to IRC §3405(d).[3]
As well, because it is a designated distribution, reporting of any distribution in excess of $10 will be required on a Form 1099-R pursuant to IRC §6047(d).[4]
The ruling provides a warning in a footnote—the ruling should not be taken to indicate that such a distribution to a state unclaimed property fund would not violate other federal or state law:
This revenue ruling does not address whether the payment to the State J unclaimed property fund otherwise complies with applicable law. For example, it does not address compliance with any search requirements applicable under state law and does not address matters arising under Title I of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829, as amended, for which the Department of Labor has subject matter jurisdiction under Reorganization Plan No. 4 of 1978, 5 U.S.C. App.[5]