Retirement plan administrators have for years sung the sad lament of what to do with missing participants. Ol’ Hank Williams himself could have written a hit song about the problem. Recent guidance from the IRS may have the retirement community singing a slightly different tune, however.
The hassle of keeping plan accounts open for lost or deceased former employees can be a real problem, especially for terminating plans. When participants go missing, retirement plan administrators have few alternatives. One alternative that has been discussed is the use of state unclaimed property funds (sometimes called by their old-fashioned name, “escheat” law). Plans previously were reluctant to escheat unclaimed retirement accounts to state funds due to concerns over how to report tax and withholding. But recent guidance from the IRS (Revenue Ruling 2020-24) makes clear that if a plan escheats funds to the state, it is appropriate for the plan to treat the payment as being includible in gross income and subject to federal income tax withholding, reportable on a Form 1099-R.
The IRS also issued a second piece of guidance addressing a corollary issue. Revenue Procedure 2020-46 provides relief to individuals who later claim retirement funds after they have been turned over to the state. The IRS says IRAs and other plan providers can accept rollovers from those individuals if they self-certify that they qualify for a waiver of the 60-day rollover requirement.
Note that the IRS guidance does not address one of the key worries that has kept plans from depositing missing participant accounts with state unclaimed property funds. Namely, the concern is that ERISA as federal law may pre-empt the plan administrator’s ability to use state law to offload the obligation. The IRS’s guidance doesn’t alleviate this concern. As a result, plans will still want to exercise caution before turning a participant’s account over to a state fund. Terminating plans may still prefer the DOL’s regulatory safe harbor permitting the accounts to be moved to IRAs.