As increasing retirement savings continues to be a concern among Americans, will the rules surrounding unclaimed IRAs and 401(k) plans change?
May 2018: IRS Issues Revenue Ruling 2018-17 Regarding Unclaimed IRAs
- The escheatment of an IRA account constitutes a designated distribution, subject to a 10% federal withholding.
- Trustees/custodians of the IRA must issue a 1099R when reporting unclaimed IRAs to the state.
- Per Revenue Ruling 2018-90, the deadline for holders to comply with the Ruling is extended to January 1, 2020.
February 2019: US Government Accountability Office (“GAO”) Report Concludes that Federal Action Is Needed to Clarify Tax Treatment of Unclaimed 401(k) Plans and Provides Recommendations:
- The IRS Commissioner should work with the Department of the Treasury to consider clarifying if transfers of unclaimed savings from employer-based plans (such as 401(k) plans) to the states are distributions, what, if any, tax reporting and withholding requirements apply, and when they apply.
- The IRS Commissioner should work with the Department of the Treasury to consider adding retirement savings transferred to states from terminating defined contribution plans to the list of permitted reasons for rolling over savings after the 60-day rollover period, in a form consistent with the rules adopted on the taxation of transfers of unclaimed retirement savings.
- The Secretary of Labor should specify the circumstances, if any, under which uncashed distribution checks from active plans can be transferred to the states.
Link to Highlights of GAO Report
March 2019: Federal Bill US H 1994 Introduced, AKA the “SECURE” Act, with Bipartisan Support to Amend the Internal Revenue Code as Follows:
- Increase the age for required minimum distributions from retirement plans from 70.5 to 72 years.
- Modify the required minimum distribution rules for defined contribution plans and IRA balances such that upon the death of the account owner, distributions to individuals other than the surviving spouse (and certain other classes of beneficiaries) must be distributed by the end of the 10th year following the year of the employee or IRA owner’s death.
- Expand 529 education accounts to cover registered apprenticeships; homeschooling; and private elementary, secondary or religious schools.
Link to Summary of US H 1994
Important Considerations for Holders:
- To comply with Rev. Ruling 2018-17, if the IRA consists of securities, compliance could require holders to liquidate some of the securities in the IRA to satisfy the withholding requirement and would violate federal securities law and cause a potential loss in investment value in the securities to the IRA owner.
- Assuming holders can comply with the Revenue Ruling, can holders make the necessary system updates in time for the January 1, 2020 deadline and issue a Form 1099R?
- Reporting unclaimed distributions from active 401(k) plans if they become reportable in the future.
- Consideration of any change in the tax treatment for 401(k) funds if they are reported as unclaimed property?