IRS Issues Guidance on Payments to State Unclaimed Property Funds

The IRS on Oct. 16 modified guidance and clarified rules to address payments made to state unclaimed property funds. The IRS announced the changes in Revenue Procedure (Rev. Proc.) 2020-46 and Revenue Ruling (Rev. Rul.) 2020-24. 

Rev. Proc. 2020-46

Rev. Rul. 2020-46 modifies and updates Rev. Proc. 2016-47, 2016-37 I.R.B. 346, which provides a list of permissible reasons for a taxpayer to self-certify eligibility for a waiver of the 60-day rollover requirement under certain eligible retirement plans. Rev. Proc. 2016-47 provides guidance concerning waivers of the 60-day rollover requirement contained in Internal Revenue Code Sections 402(c)(3) and 408(d)(3). Specifically, it provides for a self-certification procedure (subject to verification on audit) that may be used by a taxpayer claiming eligibility for a waiver under Code Sections 402(c)(3)(B) or 408(d)(3)(I) regarding a rollover into a plan or IRA. It provides that a plan administrator, or an IRA trustee, custodian or issuer may rely on the certification in accepting and reporting receipt of a rollover contribution. 

Rev. Proc. 2020-46 modifies Rev. Proc. 2016-47 by adding a new reason for a taxpayer to self-certify eligibility for a waiver of the 60-day rollover requirement under certain eligible retirement plans: a distribution having been made to a state unclaimed property fund. As under Rev. Proc. 2016-47, a self-certification relates only to the reasons for missing the 60-day deadline, not to whether a distribution is otherwise eligible to be rolled over. 

Under Rev. Proc. 2020-46, a taxpayer must have missed the 60-day deadline because of the inability to complete a rollover due to one or more of the following reasons: 

• an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates; 
• the distribution, having been made in the form of a check, was misplaced and never cashed;
• the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan; 
• the taxpayer’s principal residence was severely damaged; 
• a member of the taxpayer’s family died; 
• the taxpayer or a member of the taxpayer’s family was seriously ill; 
• the taxpayer was incarcerated; 
• restrictions were imposed by a foreign country; 
• a postal error occurred; 
• the distribution was made on account of a levy under Code Section 6331 and the proceeds of the levy have been returned to the taxpayer; 
• the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information; or 
• the distribution was made to a state unclaimed property fund.

A self-certification under this revenue procedure applies only for purposes of a waiver of the 60-day requirement for a valid rollover; it does not apply for purposes of any other requirement for a valid rollover.

Rev. Rul. 2020-24

Rev. Rul. 2020-24 clari?es the federal income tax withholding and reporting obligations that apply for the year a payment is made from a qualified plan to a state unclaimed property fund. It does so by examining whether under specific circumstances the payment of an individual’s accrued benefit from a plan is subject to federal income tax withholding under Code Section 3405, and whether the payment is subject to reporting under Code Section 6047. 

In this scenario, the employer is the plan administrator of a qualified retirement plan under Code Section 401(a) that does not include designated Roth accounts under Code Section 402A, hold employer securities or provide benefits described in Code Sections 104 or 105. The individual in question has an accrued benefit in the plan with a value of $900, has not made a withholding election under Code Section 3405 and has no investment in the contract under Code Section 72 regarding the benefit. In 2020, the individual’s accrued benefit is paid to the state’s unclaimed property fund, a fund under which a claim for property may be made by an owner.

The IRS holds in Rev. Rul. 2020-24 that because none of the statutory exceptions from treatment as a designated distribution in Section 3405(e)(1)(B) apply to the payment of the individual’s accrued benefit from the plan, the payment, including the amount withheld, is a designated distribution. Accordingly, it says, the payment is subject to federal income tax withholding under Section 3405(d).

The IRS also holds that the plan’s payment of the individual’s accrued benefit, including both the amount sent to the State J unclaimed property fund and the amount withheld, is a designated distribution under Section 3405(e)(1) that exceeds the reporting threshold. Accordingly, the IRS says, the employer is required to report that designated distribution in Box 1, and the federal income tax withheld in Box 4, of the Form 1099-R for 2020.

Rev. Rul. 2020-24 does include transition relief. The IRS says that a person will not be treated as failing to comply with these withholding and reporting requirements regarding payments made before the earlier of Jan. 1, 2022, or the date it becomes reasonably practicable for the person to comply with those requirements.