IRA

Retirement Spotlight: IRS Releases New Escheatment Guidance

Handling unclaimed account balances has always challenged plan administrators and financial organizations. Even some government-approved options—such as rolling over plan assets to an IRA—can create difficulties when distributing missing or unresponsive individuals’ account balances. Escheating (i.e., reverting) assets to a state’s unclaimed property fund is also an option—especially for smaller account balances—but it’s usually considered a last-ditch effort by plan administrators and financial organizations who have tried but failed to locate missing account owners and their beneficiaries.

In January 2019, the U.S. Government Accountability Office (GAO) released a GAO 19-88 report that found reporting and withholding inconsistencies among plan administrators who escheated plan assets to a state’s unclaimed property fund. The GAO found that some plan administrators withheld taxes on escheated plan assets, but others did not. The GAO also found that administrators could benefit from additional guidance on reporting escheated assets and on whether individuals could later roll over escheated amounts to an IRA.

In response to the GAO’s recommendations, in October 2020 the IRS issued Revenue Ruling (Rev. Rul.) 2020-24 and Revenue Procedure (Rev. Proc.) 2020-46. This guidance builds on previous pronouncements in Rev. Proc. 2016-47, which provided self-certification procedures for rollovers, Rev. Rul. 2018-17, which explained how financial organizations should report escheated IRA assets, and Rev. Rul. 2019-19, which laid out reporting and withholding requirements for uncashed checks.

This Retirement Spotlight summarizes Rev. Rul. 2020-24 and Rev. Proc. 2020-46 and explains how they interact with other IRS and Department of Labor (DOL) guidance.

 

Highlights of Rev. Rul. 2020-24

In Rev. Rul. 2020-24, the IRS provides the following escheatment example and determines that the distribution is subject to withholding and reporting requirements.

  • A 401(a) qualified retirement plan administrator escheats an individual’s $900 account balance to a state unclaimed property fund. (This amount is beneath the $1,000 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.
  • The plan administrator does not have a withholding election on file for this individual.

Withholding Requirements – The IRS states that the $900 distribution is a “designated distribution” and is subject to the withholding requirements under Internal Revenue Code Section (IRC Sec.) 3405. A designated distribution is defined as any taxable payment from a deferred compensation plan (which is broadly defined), an IRA, or a commercial annuity. The IRS also notes that the following payments are not considered designated distributions.

  • Wages
  • Payments to a nonresident alien or corporation
  • Dividends on employer securities

Because the $900 designated distribution is considered an eligible rollover distribution, the plan administrator must withhold 20 percent ($180) for federal income taxes.

Reporting Requirements The IRS ruling verifies that plan administrators must report this type of distribution on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Although the escheated assets are being paid to the state’s unclaimed property fund, the plan administrator must report the $900 distribution amount in Box 1, Gross distribution, and the $180 federal withholding amount is reported in Box 4, Federal Income tax withheld. While Rev. Rul. 2018-17 verifies that financial organizations should report escheated IRA assets under the missing individual’s name and Social Security number, Rev. Rul. 2020-24 is silent on this issue. Additional guidance may be needed.

Transition Relief Although many plan administrators already follow the withholding and reporting requirements described in Rev. Rul. 2020-24, the IRS is providing a transition period for those who need time to prepare. Plan administrators must comply with this guidance by the earlier of 1) the first payment date that occurs on or after January 1, 2022, or 2) the date it becomes “reasonably practicable” to comply.

 

Highlights of Rev. Proc. 2020-46

IRC Secs. 402(c)(3)(B) and 408(d)(3)(I) authorize a waiver of the 60-day rollover requirement in certain circumstances, such as when a financial organization makes a mistake or if a family member dies or becomes seriously ill. Previous IRS guidance (Rev. Proc. 2016-47) included a sample letter that may be provided to a plan administrator or financial institution to identify the reason for extending the normal 60-day period in order to complete an otherwise eligible rollover.

Rev. Proc. 2020-46 modifies Rev. Proc. 2016-47 by adding another reason to the self-certification letter: “a distribution was made to a state unclaimed property fund.” So individuals who recover escheated retirement plan assets can use this self-certification to document their rolling over such assets to an eligible plan. Self-certification applies only to the waiver of the 60-day rollover rule, so individuals cannot use this process on a distribution that is otherwise ineligible for rollover treatment, such as a required minimum distribution (RMD). Rev. Procs. 2020-46 and 2016-47 apply to eligible rollovers from 401(a) plans, 403(a) and 403(b) annuity plans, governmental 457(b) plans, and IRAs.

 

Key Takeaways

This latest IRS guidance should be evaluated in light of existing DOL guidance. The DOL considers escheatment a less desirable option and believes that ERISA preempts state escheatment laws for active retirement plans. The DOL makes its position clear in Field Assistance Bulletin (FAB) 2014-1, which addresses fiduciary duties with respect to missing participants of terminated retirement plans. In FAB 2014-1, the DOL indicates that plan administrators should roll over unclaimed balances to an IRA when possible. As a last resort, plan administrators of terminated retirement plans may escheat any unclaimed balances to a state’s unclaimed property fund. Although the DOL has not issued any guidance for active retirement plans, escheatment may still be an option for ineligible rollover distributions, such as RMDs.

Some in the industry have asked for additional guidance on missing plan participants (such as a safe harbor for retirement plans with missing participants). Although the DOL has yet to release additional guidance, the IRS has included missing participant guidance in its 2020-2021 Priority Guidance Plan. Congress has also recently introduced legislation that proposes to create a national online “lost and found” database to connect individuals with unclaimed retirement account benefits.

Meanwhile, escheatment is a viable option only after pursuing all reasonable steps to locate a missing or unresponsive plan participant or IRA owner. The IRS’s guidance addresses how to withhold and report on escheated assets, but it doesn’t address whether or when escheatment should be used. Questions also remain on how to treat escheated assets once they’re rolled over to an eligible plan. For example, consider an individual who recovered escheated assets and rolled them over to an IRA. Would the assets be taxed when distributed from the IRA, or would they be considered basis in the IRA? If the assets are treated as after-tax basis, how would the IRA owner document this? And those considering escheatment should be aware of the substantial variation in rules from state to state.

Although questions remain, plan administrators who escheat plan assets should ensure that their systems are set up to apply the correct withholding amount and to report the distribution properly. Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for the latest developments.

 

Click here for a printable version of this issue of the Retirement Spotlight.


Updated Life Expectancy Tables Published

Today’s Federal Register includes IRS final regulations providing updated life expectancy tables. These tables are to be used when calculating required minimum distributions (RMDs) from IRAs and other tax-qualified retirement savings arrangements, such as 401(k) plans. Those affected will include IRA owners, plan participants, beneficiaries, and employer-sponsored retirement plan administrators.

These final regulations take effect today, with publication in the Federal Register, but the life expectancy tables they contain will not be used for calculations until distribution calendar years beginning January 1, 2022.

The purpose of these new life expectancy and distribution tables is to ensure that future required payments from retirement savings arrangements better reflect actual life expectancies of those who receive such payments.


IRS Issues Updated Life Expectancy and Distribution Tables for Determining RMDs

The IRS has issued a pre-publication version of final regulations containing guidance and life expectancy tables to be used in the calculation of required minimum distributions (RMDs) from IRAs and other tax-qualified retirement savings arrangements, such as 401(k) plans. Those affected will include IRA owners, plan participants, beneficiaries, and employer-sponsored retirement plan administrators.

These final regulations will take effect on the date of their publication in the Federal Register, and the life expectancy tables they contain are to be used for calculations for distribution calendar years beginning January 1, 2022. The purpose for providing these updated life expectancy and distribution tables is to ensure that future required payments from retirement savings arrangements better reflect actual life expectancies of those who receive such payments.


IRS Issues Guidance on In-Kind Distribution of 403(b) Custodial Accounts of Terminating 403(b) Plans

The IRS has issued Revenue Ruling (Rev.Rul.) 2020-23, which describes the status and tax treatment of certain 403(b)(7) custodial accounts belonging to participants or beneficiaries of terminating 403(b) plans. Briefly, Rev. Rul. 2020-23 states that if such in-kind-distributed custodial accounts comply with the conditions in this guidance, they will retain their tax-deferred status as 403(b) custodial accounts, until such time as the assets they contain are actually paid out to the participant or beneficiary to whom they belong.


Legislation Would Allow Tax Benefits for Retirement Distributions Used for LTC Insurance

Senator Patrick Toomey (R-PA), has introduced S. 4820, legislation that would permit tax-free retirement savings distributions of up to $2,500 per year—indexed for inflation—that are used to purchase long-term care insurance. The arrangements to which the legislation applies would include qualified retirement plans, 403(a) and 403(b) plans, governmental 457(b) plans, and IRAs.

These distributions appear to be exempt from the 10 percent early distribution penalty tax by virtue of their being tax-free. The bill would also create new distribution triggers for employee deferral amounts that have been contributed to 401(k), 403(b), and governmental 457(b) plans.


IRS Announces Louisiana Hurricane-Related Deadline Extensions

The IRS has issued Announcement LA-2020-05, which describes the postponement of deadlines for victims of Hurricane Delta, damage from which began on October 6, 2020. In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of many time-sensitive, tax-related acts described in Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.

The parishes included in the relief include Acadia, Calcasieu, Cameron, Jefferson Davis, and Vermilion. Taxpayers in other locations will automatically be added to the relief if the disaster area is further expanded.

Affected taxpayers with a covered deadline occurring on or after October 6, 2020, and on or before February 16, 2021, will have until February 16, 2021, to complete the act. “Affected taxpayer” automatically includes anyone who resides, or has a business located, within the designated disaster area. Those who reside or have a business located outside the identified disaster area, but have been affected by the hurricane, may contact the IRS at 866-562-5227 to request the relief.


IRS Updates California Wildfire-Related Deadline Extensions

The IRS has updated previously-issued Announcement CA-2020-07, which describes the postponement of deadlines for victims of California wildfires that began on September 4, 2020. In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of many time-sensitive, tax-related acts described in Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.

The counties included in the relief now include Fresno, Los Angeles, Madera, Mendocino, Napa, San Bernardino, San Diego, Shasta, Siskiyou, and Sonoma counties. Taxpayers in other locations will automatically be added to the relief if the disaster area is further expanded.

Affected taxpayers with a covered deadline occurring on or after September 4, 2020, and on or before January 15, 2021, will have until January 15, 2021, to complete the act. “Affected taxpayer” automatically includes anyone who resides, or has a business located, within the designated disaster area. Those who reside or have a business located outside the identified disaster area, but have been affected by the wildfires, may contact the IRS at 866-562-5227 to request the relief.


Sequel to SECURE Act Introduced in Final Days Before General Election

House Ways and Means Committee Chairman Richard Neal (D-MA) and GOP Ranking Member Kevin Brady (R-TX) have introduced the Securing a Strong Retirement Act of 2020, legislation that is described as building on major retirement legislation enacted in December 2019. The new legislation is being referred to as “SECURE 2.0,” a reference to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 that preceded it.

It is not generally expected that this legislation will be acted upon before the November 3 elections, or necessarily even during the “lame duck” period between November 3 and the seating of the 117th Congress in January. Instead, it could represent the first attempt at bipartisan retirement legislation to be considered in 2021.

The following provisions are included in the proposed legislation.

  • Require automatic enrollment of eligible employees in 401(k), 403(b) and SIMPLE IRA plans with certain exceptions and grandfathering provisions
  • Further enhance the small retirement plan start-up credit, with a maximum credit of 100% (vs. the current 50%) for employers with no more than 50 employees
  • Increase the amount of, and eligibility for, the “saver’s credit” for taxpayers making IRA contributions or deferral contributions to employer-sponsored retirement plans
  • Exempt up to $100,000 of accumulated retirement account balances from required minimum distribution (RMD) requirements
  • Reduce the penalty for failure to satisfy RMD requirements from 50% to 25%; if an IRA RMD failure is timely corrected, the penalty would be further reduced to 10%
  • Permit 403(b) plans to invest in collective investment trusts
  • Increase the RMD age to 75 from 72 (increased from 70½ to 72 by the SECURE Act)
  • Align ESOP rules of S Corporations with those of C Corporations
  • Provide for indexing of IRA catch-up contributions
  • Provide a second, higher tier of catch-up deferral contributions for those age 60 and older, with indexing provision
  • Permit 403(b) plans to participate in multiple employer plan (MEP) arrangements
  • Permit certain student loan repayments to qualify for employer retirement plan matching contributions
  • Allow a small employer joining a MEP or pooled employer plan (PEP) arrangement to potentially claim a small plan start-up credit during the first three years of the MEP/PEP arrangement’s existence
  • Provide a new small employer tax credit for enhanced plan eligibility for military spouses
  • Enhance options for correcting employee salary deferral errors
  • Increase the qualifying longevity annuity contract (QLAC) RMD exemption
  • Permit increasing payments in IRA and defined contribution plan life annuity benefits
  • Allow retirement plan fiduciaries additional discretion in whether to seek recoupment of accidental overpayments
  • Simplify retirement plan disclosures to non-participating employees
  • Create a national online “lost and found” database to connect individuals with unclaimed retirement account benefits
  • Expand the IRS retirement plan correction program to permit self-correction of certain inadvertent IRA errors
  • Permit tax-free qualified charitable contributions to be made from employer-sponsored retirement plans (now permitted only from IRAs)
  • Make certain technical corrections to SECURE Act provisions

2021 Retirement Savings Limitations Released

The IRS has issued Notice 2020-79, which contains the following 2021 retirement savings plan limitations.

  • Annual additions under Internal Revenue Code Section (IRC Sec.) 415(c)(1)(A) for defined contribution plans: $58,000 ($57,000 for 2020)
  • Annual additions under IRC Sec. 415(b)(1)(A) for defined benefit pension plans: $230,000 (unchanged)
  • Annual deferral limit (402(g) limit) for 401(k), 403(b) and 457(b) plans: $19,500 (unchanged)
  • Catch-up contributions to 401(k), 403(b), and 457(b) plans: $6,500 (unchanged)
  • Annual deferral limit for SIMPLE IRA and SIMPLE 401(k) plans: $13,500 (unchanged)
  • Catch-up contributions for SIMPLE IRA and SIMPLE 401(k) plans: $3,000 (unchanged)
  • IRC Sec. 401(a)(17) compensation cap: $290,000 ($285,000 for 2020)
  • Highly compensated employee (HCE) definition income threshold: $130,000 (unchanged)
  • Top-heavy determination key employee definition income threshold: $185,000 (unchanged)
  • SEP plan employee income threshold for benefit eligibility: $650 ($600 for 2020)
  • Qualifying longevity annuity contract (QLAC) amount excludible from required minimum distribution determinations: $135,000 (unchanged)

IRA Contribution and Taxpayer Contribution Credit Amounts
Annual limitations for IRA contributions, deductibility for those who are active participants in employer-sponsored retirement plans, and those seeking an income tax credit for retirement saving contributions, have slightly different indices than are used for determining cost-of-living adjustments (COLAs) in employer plans. Following are the limitations for 2021.

  • Traditional and Roth IRA contributions: $6,000 (unchanged)
  • Traditional and Roth IRA catch-up contributions: $1,000 (not subject to COLA adjustments)
  • IRA deductibility phase-out for single taxpayers participating in employer plans rises to $66,000 to $76,000 (was $65,000 to $75,000)
  • IRA deductibility phase-out for married joint filing taxpayers participating in employer plans rises to $105,000 to $125,000 (was $104,000 to $124,000)
  • IRA deductibility phase-out for married with spouse an active participant in employer plan rises to $198,000 to $208,000 (was $196,000 to $206,000)
  • Roth IRA income limitation for determining maximum contribution for married joint filers: phase-out range rises to $198,000 to $208,000 (was $196,000 to $206,000)
  • Roth IRA income limitation for determining maximum contribution for single filers and heads-of-households: phase-out range rises to $125,000 to $140,000 (was $124,000 to $139,000)

Taxpayers who make contributions to IRAs or deferral-type employer-sponsored retirement plans of up to $2,000 may be eligible for a special income tax credit, the “saver’s credit,” of 10, 20, or 50 percent of the amount contributed, depending on their income.

For joint filers, the maximum adjusted gross income level for

  • the 50 percent tax credit is $39,500;
  • the 20 percent tax credit is $43,000; and
  • the 10 percent tax credit is $66,000.

For head of household filing status, the maximum adjusted gross income level for

  • the 50 percent tax credit is $29,625;
  • the 20 percent tax credit is $32,250; and
  • the 10 percent tax credit is $49,500.

For all other filing statuses, the maximum adjusted gross income level for

  • the 50 percent tax credit is $19,750;
  • the 20 percent tax credit is $21,500; and
  • the 10 percent tax credit is $33,000.

 

 

 


IRS Revises Rollover Self-Certification Rules to Include Accounts Recovered From Unclaimed Property Funds

The IRS has issued Revenue Procedure (Rev. Proc.) 2020-46, which modifies earlier guidance describing the process by which taxpayers can self-certify their eligibility for an extension of the 60-day deadline to complete an otherwise-eligible rollover.

Previous IRS guidance (Rev. Proc. 2016-47) identified circumstances under which a taxpayer would be eligible to extend the normal 60-day period in which to complete a rollover, and the procedure by which one can self-certify that eligibility. Rev. Proc. 2020-46 now adds to these qualifying circumstances amounts that are recovered by a taxpayer after being distributed and paid “to a state unclaimed property fund.”

This new guidance does not modify in any manner other conditions necessary for rollover eligibility. (Rev. Proc. 2020-46 was issued simultaneous to IRS Revenue Ruling 2020-24, which describes withholding and reporting obligations of qualified retirement plans that escheat amounts to unclaimed property funds.)