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Federal Tax Withholding and Reporting Requirements for Distributions from a Qualified Retirement Plan to a State?ÇÖs Unclaimed Property Fund

Third party administrators for employer-sponsored qualified retirement plans often recommend to employers that unclaimed account balances for mandatory cash-outs of small amounts (under $1,000) be remitted to the unclaimed property fund for the participant?ÇÖs state of residence. The IRS recently clarified in Rev. Rul. 2020-24 that amounts remitted to a state?ÇÖs unclaimed property fund are subject to withholding under Section 3405 of the Internal Revenue Code (the ?Ç£Code?Ç¥) and, in the event the amounts distributed exceed $10, reporting under Section 6047 of the Code. A plan sponsor will not be treated as failing to comply with the withholding and reporting requirements with respect to payments made before the earlier of January 1, 2022 or the date it becomes reasonably practicable for the plan sponsor to comply with such requirements.

An employer that sponsors a qualified retirement plan should discuss this guidance with their plan?ÇÖs third-party administrator to ensure that any amounts remitted to a state?ÇÖs unclaimed property fund will comply with these withholding and reporting requirements.

Rev. Rul. 2020-24 is available here.

The lawyers of our Employee Benefits and Executive Compensation Practice Group are readily able to assist companies on a nationwide basis with implementing sophisticated benefit plans and providing answers to their most challenging compensation issues. Additionally, our lawyers are well aware of the daily employee benefits challenges facing companies of all sizes and are capable of helping in-house lawyers and human resources personnel with the day-to-day advice and guidance necessary to properly administer employee benefits plans.

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