Sometimes, a retirement plan is required to distribute a missing participant’s account balance into a state’s unclaimed property fund. Until recently, it was unclear whether this distribution is subject to withholding of federal income tax and how this distribution is supposed to be reported to the IRS.

The IRS finally cleared up both issues by ruling that (1) the total amount distributable (i.e., the entire account balance) is subject to withholding of federal income tax, and (2) any distribution of $10 or more must be reported on Form 1099-R. The total amount distributable (before tax withholding) must be reported on Box 1. And the amount withheld for federal income tax must be reported on Box 4.

In separate guidance, the IRS also explained that a retirement plan’s distribution to an unclaimed property fund can be a good reason for a waiver of the 60-day deadline for making tax-free rollovers. Remember, a distribution from a retirement plan or IRA isn’t taxable if the amount distributed is rolled over into another retirement plan or IRA within 60 days after the distribution. You can request a waiver of the 60-day deadline by self-certifying that the failure to meet the deadline was because of certain good reasons, including incarceration, postal error, and a death or illness in the family. Now, according to the IRS, this list of good reasons includes a distribution to an unclaimed property fund.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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