ERISA plans have a procedure that is typically followed by financial institutions if a participant is “lost.” But what do you do in a non-ERISA 403(b) or under an IRA if the participant can’t be found… below is a series of Qs and As centering on escheatment that address some of the issues and some ways they can be resolved!
Q1: What does it mean to escheat assets?
A1: In the context of retirement accounts, escheatment is the reversion of unclaimed or abandoned assets to the state in accordance with their escheat and unclaimed property statutes.
Q2: When is an account eligible for escheatment to the state?
A2: The escheatment rules for non-ERISA accounts are subject to the state laws of the trustee/custodian. Each state has its own set of requirements, which can typically be found on the website for the state’s unclaimed property program via the state treasury department. The state requirements for escheatment of retirement assets can vary. Generally, the account must be inactive for a specific “dormancy period”, and the participant must either reach a specified age or distributable event.
Because of the DOL’s interpretation of ERISA preemption, accounts subject to ERISA can generally only be escheated at the direction of the courts after considering the state’s escheat laws as they apply to a specific case. If a plan has been abandoned, the DOL’s abandoned plan program can be used to appoint an administrator to terminate the plan. In these cases, and when missing participants impede a plan’s termination process, it has been an acceptable practice to escheat the assets of a missing participant under the state’s unclaimed property statute.
Q3: Can assets be escheated in-kind?
A3: Typically, yes, but again this could vary from state to state.
Q4: Does escheating assets to the State require a 1099-R?
A4: Yes. PenServ contacted the IRS to confirm that a 1099-R be issued at escheatment and they agreed. Additionally, in their 2015 report, the IRS Information Reporting Program Advisory Committee (IRPAC) indicated the committee believed IRA assets escheated to state governments are distributions includable in gross income, and should be reported on Form 1099-R. IRPAC stated that escheated distributions reported on Form 1099-R would hasten recovery of the money from the state, because it would trigger a deficiency notice from IRS to the taxpayer if they file their annual tax return without including the escheated distribution as part of their taxable income.
Q5: Does tax withholding apply to the escheated distribution?
A5: Yes. This was made clear in the 2015 IRPAC report as well. Remember that withholding applies unless the taxpayer waives it, and since they are missing waiving is not an option.
Q6: What code should be used in box 7 to report the distribution on the 1099-R?
A6: There is no clear guidance as to specific reporting codes at this time. In our discussions with the IRS, we suggested that the age-based distribution code be used (either 1 or 7), and they agreed that would be acceptable. This may change in the future however, since one of the 2015 IRPAC recommendations was that the IRS create a new Form 1099-R distribution code for Box 7, titled “IRA Assets Escheated to State.” The IRPAC report indicates IRA assets escheated to state governments are distributions includable in gross income.
Q7: Are escheated distributions eligible for rollover once claimed by the participant?
A7: No formal guidance has been issued on whether reclaimed assets are eligible for rollover. When we posed this question to the IRS the answer we received was yes, provided they are rolled over within 60 days of receipt. It is important to note that in this case, the taxpayer actually did not receive the distribution until after the state contacted them, not when the distribution was made to the state.
Q8: If IRA assets escheated to the state consisted of property, and the state subsequently sold the property and is now holding cash, can the taxpayer roll the cash back to the IRA? (Keep in mind that the IRA rollover rules contain a restriction that when rolling over property, the same property must be rolled over to the receiving IRA within 60 days.)
A8: Since no formal guidance has been issued, once again we went to the IRS, and their answer was yes. Though on its surface this violates the IRA regulations, their position is that the taxpayer DID NOT sell the property (the state did!), so if the financial institution can buy back the same property that was sold, this is ‘”an equitable solution.”
Q9: Will the IRS issue guidance regarding escheatment?
A9: Yes. It is our understanding that this has been a topic of discussions within the organization, and that they are preparing to issue guidance sometime in the future.
Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services, Inc. and Chair of the NTSA Communications Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.