The IRS has issued Revenue Ruling 2020-24, guidance for qualified retirement plans that pay or “escheat” certain accounts of unresponsive or missing participants or beneficiaries to state unclaimed property funds. The guidance addresses the issues of tax withholding and reporting when such amounts are escheated.
In Revenue Ruling 2020-24, the IRS poses an escheatment scenario for illustration purposes, and describes what is required under this fact pattern.
- The balance in the account being escheated is $900 (an amount beneath the threshold that would require an automatic rollover to an IRA).
- The account does not include employer securities, nondeductible employee contributions, designated Roth amounts, or accident or health plan benefits.
- There is no withholding election with respect to this account.
- It is being paid to a state unclaimed property fund from which the owner can later make a claim.
An amount as described in the Revenue Ruling 2020-24 example is a “designated distribution” (not wages, not a payment to a nonresident alien or corporation, or dividends on employer securities), and is therefore subject to withholding under Internal Revenue Code Sec. 3405.
Qualified retirement plans must report such a payment on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The distribution amount is reported in Box 1, and the federal withholding amount (e.g., 20%) is reported in Box 4.
The date by which qualified retirement plans must comply with this guidance is the earlier of the following.
- The date it becomes “reasonably practicable” to comply
- A payment date occurring on or after January 1, 2022