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More IRS Guidance Needed on Unclaimed 401(k) Savings: GAO

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The Internal Revenue Service should issue further guidance to clarify the tax treatment of unclaimed 401(k) plan savings that have been transferred to states, the Government Accountability Office advises. And states need to push for greater efforts to find the owners of these funds, according to Phyllis Borzi, a former Labor Department official.

In a January report, GAO states that while the IRS and the Labor Department 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.”

IRS “has not specified whether 401(k) plan providers should report state transfers to IRS as distributions and withhold federal income taxes,” GAO said.

IRS officials, according to the GAO, said the agency has not issued guidance to clarify the issue because of “competing priorities.”

As a result, 401(k) plan provider practices vary. “Some providers withhold taxes when transferring savings to states while others do not,” GAO said.

“This makes the IRS less likely to collect federal income taxes that may be due if transfers are taxable events,” GAO said, adding that the IRS also needs to ensure that individuals who claim 401(k) savings from a state can roll over these savings to other tax-deferred retirement accounts after IRS’ 60-day deadline.

IRS allows individuals to roll over savings after 60 days for several reasons, none of which include claiming 401(k) savings from a state, GAO said.

Account owners who are unable to roll over their reclaimed savings “forgo the opportunity to continue investing the funds on a tax-deferred basis,” GAO maintains.

Millions of dollars in retirement savings are transferred to states as “unclaimed property, only some of which is later claimed by owners,” the GAO explains.

As workers shift jobs and leave behind retirement savings accounts, retirement savings are more likely to be unclaimed. Stating that an exact figure is not known, unclaimed retirement savings in the United States have been estimated to exceed $100 billion, GAO states.

Where Are the Owners?

Phyllis Borzi, former head of the Labor Department’s Employee Benefits Security Administration, told ThinkAdvisor that as the GAO report notes, “transfers of this type remove plan assets from ERISA protections, so one needs to be sure that sufficient state protections exist to be sure that efforts to find the rightful owners of these funds continue and the money doesn’t simply escheat to the state so that it can be used for other state purposes.”

Borzi said she noticed after a “quick read” of the report that it failed to reference “the enforcement activity first undertaken by EBSA’s Philadelphia office to be sure that plan sponsors were diligent in their search to locate” the so-called “missing” or “lost” participants.

The Philadelphia project, Borzi continued, “has been expanded to most if not all EBSA field offices and millions of dollars in plan assets have now found their way to former plan participants, their rightful owners.”

While it’s important that GAO “has highlighted the problem and suggested possible steps that can be taken to address unclaimed plan savings, the potential losses that participants suffer from unclaimed funds should also be addressed by more vigorous efforts to be sure that plan sponsors undertake necessary steps to locate lost participants,” Borzi said.

In recent years, both the Social Security Administration and the IRS, Borzi added, “have discontinued providing tools that plan sponsors found useful to help them find missing participants.”

Uncashed Checks

Fred Reish, a partner at Drinker, Biddle & Reath in Los Angeles, adds that the GAO report covers not only unclaimed IRAs but uncashed checks. “If there isn’t any activity with regard to an IRA for a period of years, and perhaps the IRA trustee (eg., a bank) can’t locate the IRA owner, the money escheats to the state.”

Regarding uncashed checks, “plans send out checks as requested distributions, forced distributions of less than $1,000, and minimum required distributions,” Reish explained. “In some cases, those checks are never cashed. After a period of time, the check will escheat to the state as unclaimed property. Both of those happen more than you would think.”

In fact, of the 22 states responding to a GAO survey, 17 states provided data indicating that $35 million in unclaimed retirement savings was transferred to them from employer plans and IRAs in 2016.

Assets and uncashed checks from employer plans (such as 401(k) plans) were the most common form of retirement savings transferred to states. After funds are transferred, owners can claim their savings from the state.

According to the 15 states providing data on this, owners claimed about $25 million in retirement savings in 2016: $601, on average, from 401(k) plan checks, and $5,817, on average, from traditional lRAs, GAO said.

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