Plan Benefit Paid to State Fund Is Subject to Withholding, Information Reporting

Plan Benefit Paid to State Fund Is Subject to Withholding, Information Reporting

Internal Revenue Service

The IRS has ruled (Rev. Rul. 2020-24) that the payment of an individual’s accrued benefit from a qualified retirement plan is subject to federal income tax withholding under <a href="/research/federal/usc26/3405" resolve="/lr/resolve//cplq">section 3405</a> and information reporting under <a href="/research/federal/usc26/6704" resolve="/lr/resolve//cph7">section 6047</a>. According to the facts of the ruling, the plan does not include designated Roth accounts under <a href="/research/federal/usc26/402A" resolve="/lr/resolve//cp3c">section 402A</a>, hold employer securities, or provide compensation for injuries or sickness under section 104 or an accident or health plan under <a href="/research/federal/usc26/105" resolve="/lr/resolve//cnmk">section 105</a>. An individual with a calendar year tax year has an accrued benefit in the plan with a value of $900, has not made a withholding election under <a href="/research/federal/usc26/3405" resolve="/lr/resolve//cplq">section 3405</a> regarding the benefit, and has no investment in the contract within the meaning of <a href="/research/federal/usc26/72" resolve="/lr/resolve//cp7h">section 72</a> regarding the benefit. In 2020 the individual’s accrued benefit (net of any applicable withholding) is paid to a state unclaimed property fund. <a href="/research/federal/usc26/3405" resolve="/lr/resolve//cplq">Section 3405</a> provides federal income tax withholding rules for designated distributions, which includes any distribution or payment from or under an employer deferred compensation plan, an individual retirement plan under <a href="/research/federal/usc26/7701#cq5n-0000089" resolve="/lr/resolve//cq5n#cq5n-0000089">section 7701(a)(37)</a>, or a commercial annuity. <a href="/research/federal/usc26/3405#cplq-0000031" resolve="/lr/resolve//cplq#cplq-0000031">Section 3405(e)</a> provides exceptions to treatment as a designated distribution for amounts that are wages, amounts that are subject to withholding on nonresident aliens and foreign corporations, distributions described in <a href="/research/federal/usc26/404#cqbn-0000103" resolve="/lr/resolve//cqbn#cqbn-0000103">section 404(k)(2)</a> relating to dividends on employer securities, and the portion of a distribution or payment it is reasonable to believe is not includable in gross income. Because none of the statutory exceptions apply to the payment of the individual’s accrued benefit from the plan, the IRS determined that the payment is subject to federal income tax withholding. Section 6047(d) authorizes Treasury to require an employer maintaining a plan from which designated distributions may be made (or the plan administrator) to make returns and reports regarding the plan if distributions to any person during any year total $10 or more in the aggregate. Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” is used to satisfy the reporting obligations. Because the plan payment of the accrued benefit, including both the amount sent to the state unclaimed property fund and the amount withheld, is a designated distribution that exceeds the reporting threshold, the IRS concluded that the employer must report the distribution in Box 1 and the federal income tax withheld in Box 4 of Form 1099-R. In transition relief, a person will not be treated as failing to comply with the withholding and reporting requirements described in the revenue ruling regarding 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 has ruled (Rev. Rul. 2020-24) that the payment of an individual’s accrued benefit from a qualified retirement plan is subject to federal income tax withholding under section 3405 and information reporting under section 6047.

The IRS has ruled (Rev. Rul. 2020-24) that the payment of an individual’s accrued benefit from a qualified retirement plan is subject to federal income tax withholding under section 3405 and information reporting under section 6047. According to the facts of the ruling, the plan does not include designated Roth accounts under section 402A, hold employer securities, or provide compensation for injuries or sickness under section 104 or an accident or health plan under section 105. An individual with a calendar year tax year has an accrued benefit in the plan with a value of $900, has not made a withholding election under section 3405 regarding the benefit, and has no investment in the contract within the meaning of section 72 regarding the benefit. In 2020 the individual’s accrued benefit (net of any applicable withholding) is paid to a state unclaimed property fund. Section 3405 provides federal income tax withholding rules for designated distributions, which includes any distribution or payment from or under an employer deferred compensation plan, an individual retirement plan under section 7701(a)(37), or a commercial annuity. Section 3405(e) provides exceptions to treatment as a designated distribution for amounts that are wages, amounts that are subject to withholding on nonresident aliens and foreign corporations, distributions described in section 404(k)(2) relating to dividends on employer securities, and the portion of a distribution or payment it is reasonable to believe is not includable in gross income. Because none of the statutory exceptions apply to the payment of the individual’s accrued benefit from the plan, the IRS determined that the payment is subject to federal income tax withholding. Section 6047(d) authorizes Treasury to require an employer maintaining a plan from which designated distributions may be made (or the plan administrator) to make returns and reports regarding the plan if distributions to any person during any year total $10 or more in the aggregate. Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” is used to satisfy the reporting obligations. Because the plan payment of the accrued benefit, including both the amount sent to the state unclaimed property fund and the amount withheld, is a designated distribution that exceeds the reporting threshold, the IRS concluded that the employer must report the distribution in Box 1 and the federal income tax withheld in Box 4 of Form 1099-R. In transition relief, a person will not be treated as failing to comply with the withholding and reporting requirements described in the revenue ruling regarding payments made before the earlier of January 1, 2022, or the date it becomes reasonably practicable for the person to comply with those requirements.

Sec. 3405 Special rules for pensions, annuities, and certain other deferred income

Sec. 6047 Information relating to certain trusts and annuity plans

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Plan Benefit Paid to State Fund Is Subject to Withholding, Information Reporting