Federal Tax Withholding and Reporting Requirements for Distributions from a Qualified Retirement Plan to a State’s 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’s state of residence. The IRS recently clarified in Rev. Rul. 2020-24 that amounts remitted to a state’s unclaimed property fund are subject to withholding under Section 3405 of the Internal Revenue Code (the “Code”) 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’s third-party administrator to ensure that any amounts remitted to a state’s unclaimed property fund will comply with these withholding and reporting requirements.
Rev. Rul. 2020-24 is available here.