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GAO Report Spotlights Unclaimed 401(k) Plan Tax Treatment Uncertainty

Posted By Administration, Wednesday, February 27, 2019

In May 2018, the Internal Revenue Service issued Revenue Ruling 2018-17, stating that IRA holders must withhold 10 percent federal income tax and issue form 1099Rs when reporting unclaimed IRAs to the states. The deadline for doing so was originally set at Jan. 1, 2019, but was later extended to Jan. 1, 2020. 


In February 2019, the tax treatment of unclaimed retirement accounts was in the spotlight again, but this time the accounts at issue were 401(k) accounts. The U.S. Government Accountability Office issued a 59-page report, Federal Action Needed to Clarify Tax Treatment of Unclaimed 401(k) Plan Savings Transferred to States. 


Based on information learned, in part, by surveying the states, IRA transfer agents and 401(k) plan service providers, the GAO reached several conclusions:

  • Although the IRS and Department of Labor have issued guidance on transferring retirement savings to states, the IRS has not clarified certain responsibilities or ensured that the retirement savings that owners claim from states can be rolled over into other tax-deferred retirement accounts. 
  • The IRS has not specified whether 401(k) plan providers should report state transfers as distributions and withhold federal income taxes. 
  • 401(k) plan provider practices vary. Some providers withhold taxes when transferring savings to states while others do not. This makes the IRS less likely to collect federal income taxes that may be due if transfers are taxable events. 
  • The IRS has not taken action to ensure that individuals who claim 401(k) savings from a state can roll over these savings to other tax-deferred retirement accounts. The IRS allows individuals to roll over savings after 60 days for several reasons, none of which include claiming 401(k) savings from a state. Account owners who are unable to roll over their reclaimed savings forgo the opportunity to continue investing the funds on a tax-deferred basis. 


The report includes three recommendations:

  1. The IRS Commissioner should work with the Department of the Treasury to consider clarifying whether transfers of unclaimed savings from employer-based plans (such as 401(k) plans) to states are distributions; what, if any, tax reporting and withholding requirements apply; and when they apply. 
  2. The IRS Commissioner should work with the Department of the Treasury to consider adding retirement savings transferred to states from terminating defined contribution 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. 
  3. The Secretary of Labor should specify the circumstances, if any, under which uncashed distribution checks from active plans can be transferred to the states. 


The IRS and DOL are not obligated to respond to the GAO’s recommendations, so specific action resulting from the report remains uncertain.


Read the full GAO report

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