Washington Insights – Spring 2019
March 22, 2019 | By Jon Vogler
A new report from the Government Accountability Office (GAO) calls on federal regulators to clarify the rules regarding the transfers of unclaimed savings from employer-based 401(k) plans to the states.
In this edition of Washington Insights, we explore the findings and recommendations in the GAO report, as well as the unexpected manner in which accounts may be considered to be “abandoned” for purposes of some state laws on “escheatment” (i.e., forfeiture).
The GAO report (titled “Federal action needed to clarify tax treatment of unclaimed401[k] plan savings transferred to states”) examines how much in retirement savings is transferred to states as unclaimed property, what steps the Internal Revenue Service (IRS) and Department of Labor (DOL) have taken to oversee these transfers, and what improvements are needed.1
The report finds that retirement savings are transferred to states under a variety of circumstances, including uncashed checks from active 401(k)-type plans (such as required minimum distributions payments), small account balances from terminating plans, and uncashed checks and account balances from individual retirement accounts (IRAs). The report also finds that states receiving these amounts and holders transferring amounts to the states have different procedures for handling the transfers. For example, some states liquidate securities immediately, while some do not. Additionally, some plan recordkeepers report such transfers as taxable distributions and apply withholding, while some do not.2
As one instance, individuals changing jobs throughout their careers can lead to lost and unclaimed savings, resulting in millions of dollars in retirement savings being transferred to states as unclaimed property — only some of which is later claimed by owners. In its research, the GAO found that of the 22 states responding to its survey, 17 states provided data indicating that they received $35 million in unclaimed retirement savings from employer plans and IRAs in 2016. Assets and uncashed checks from employer plans were the most common form of retirement savings transferred to states. After funds are transferred, owners can claim their savings from the state. According to the 15 states providing data on this, owners claimed about $25 million in retirement savings in 2016. States reported using a range of strategies to maintain the value of retirement savings while holding these funds, such as applying interest.3
“Without IRS clarification on whether transfers should be reported to IRS as distributions and when they should be subject to federal income tax withholding, not all plan service providers can be certain about the appropriate actions to take,” the GAO explains.1 This can affect not only the collection of federal income tax withholding, but also individuals’ retirement security, the agency notes.
Recommendations and agency response
The GAO makes the following recommendations in its report:4
- The IRS Commissioner should work with the Department of the Treasury (Treasury) to consider clarifying if transfers of unclaimed savings from employer-based plans (such as 401[k] plans) to states are distributions; which (if any) tax reporting and withholding requirements apply; and when they apply.
- The IRS Commissioner should work with the Treasury to consider adding retirement savings transferred to states from terminating defined contribution (DC) 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. IRS Revenue Procedure 2016-47 provides a self-certification procedure available for taxpayers seeking a waiver of the 60-day deadline for rollovers, under certain pre-approved circumstances. An IRS news release describing the guidance is available at: https://www.irs.gov/newsroom/new-procedure-helps-people-making-ira-and-retirement-plan-rollovers
- The Secretary of Labor should specify the circumstances, if any, under which uncashed distribution checks from active plans can be transferred to the states.
In response to the first two recommendations, the IRS noted that it will work with the Treasury to address them. In its response, the DOL stated it plans to continue to evaluate whether there are circumstances in which the transfer of uncashed distribution checks from an ongoing plan to the states advances the goal of reuniting missing participants with their savings.