IRA specialist Ed Slott.
Advisors, take note: the Internal Revenue Service has released a new ruling on the handling of missing 401(k) participants.
Revenue Ruling 2020-24, Withholding and Reporting With Respect to Payments From Qualified Plans to State Unclaimed Property Funds, is "a good heads up … to advisors who may know of clients who left 401(k) balances behind with former employers," IRA expert Ed Slott of Ed Slott & Co., told ThinkAdvisor in a Wednesday email. "Those unclaimed balances may be lost to the state."
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The IRS guidance, released in mid-October, addresses retirement plan participants "who are due a benefit but cannot be located," Slott explained.
"In the past, plan administrators may have wanted to turn over a missing participant's benefit to a state unclaimed property fund (i.e., escheat the benefit), but were unsure of their withholding and reporting obligations."
Revenue Ruling 2020-24 "makes clear that an escheated benefit is subject to federal tax withholding and must be reported on Form 1099-R," Slott said.
However, the IRS guidance "does not address another issue that has prevented plans from escheating benefits: the possibility that ERISA preemption rules prevent escheatment," Slott continued.
"So, even after this guidance, employers with ERISA plans should remain cautious about escheating benefits due missing participants. Apparently this has been an issue with some companies, but this may not be a workable solution for ERISA plans, because they must abide by the built-in ERISA protections."
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Melanie Waddell
Melanie is senior editor and Washington bureau chief of ThinkAdvisor. Her ThinkAdvisor coverage zeros in on how politics, policy, legislation and regulations affect the investment advisory space. Melanie’s coverage has been cited in various lawmakers’ reports, letters and bills, and in the Labor Department’s fiduciary rule in 2024. In 2019, Melanie received an Honorable Mention, Range of Work by a Single Author award from @Folio. Melanie joined Investment Advisor magazine as New York bureau chief in 2000. She has been a columnist since 2002. She started her career in Washington in 1994, covering financial issues at American Banker. Since 1997, Melanie has been covering investment-related issues, holding senior editorial positions at American Banker publications in both Washington and New York. Briefly, she was content chief for Internet Capital Group’s EFinancialWorld in New York and wrote freelance articles for Institutional Investor. Melanie holds a bachelor’s degree in English from Towson University. She interned at The Baltimore Sun and its suburban edition.
