Abandoned IRAs and State Escheatment
By Ben Maas, CISP, CIP, CHSP
When is an IRA considered abandoned?
When an IRA is opened, it is not anticipated that it will someday be forgotten or abandoned. But, as unlikely as that eventuality is, it does happen from time to time. This can prove problematic for IRA custodians, trustees, and issuers, that have reporting and other administrative responsibilities for IRAs.
Section 2 of the Uniform Unclaimed Property Act of 1995 gives guidance as to when a financial organization can consider an IRA abandoned. The Act states that generally an IRA can be considered abandoned if the IRA owner has not communicated an interest in the account after three years from when he or she was required to begin taking distributions. However, the Act was created as a “model” to serve as a guide for state legislation drafters. As such, your organization should refer to laws in your state to determine when property like an IRA can be considered abandoned.
State law will likely have specific language regarding a financial organization’s responsibilities for attempting to contact an IRA owner to determine if the account is truly abandoned. It may be beneficial to discuss proper procedures with your organization’s legal counsel.
We’ve determined that we do have abandoned IRAs. Can we simply distribute these IRA assets to the state?
The process for transferring abandoned IRA assets to a state is called escheatment and is more complex than simply identifying an IRA as abandoned and distributing to the state. State law will dictate the specific steps that should be taken to start and complete the escheatment process.
As with an initial determination of abandonment, you should consult and follow your state’s laws regarding escheatment procedures and requirements.
Are we required to satisfy withholding notice and general withholding requirements when escheating IRAs to the state?
Unfortunately, the IRS has not clearly identified how financial organizations should satisfy their Form W4P withholding notice requirement when escheating IRAs to the state. Informal guidance by the IRS has suggested that these requirements may be satisfied by providing the Form W4P notice to the relevant state agency. It’s important to keep in mind, however, that based on IRS Revenue Ruling (Rev. Rul.) 2018-17, the state may not waive withholding on the IRA owner’s behalf.
When an IRA owner makes a withholding election, that election generally remains valid until changed or revoked. But in the case of an abandoned IRA, there may be no withholding election on file. In such cases, Rev. Rul. 2018-17 directs a financial organization to withhold 10 percent of the distribution amount.
How should we report abandoned IRA assets that are escheated to the state?
Your financial organization must report these payments on the applicable year’s Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in the abandoned IRA owner’s name and Social Security number, using his or her last known address. Financial organizations are to enter code 1, Early distribution, no known exception, or code 7, Normal distribution, as applicable, in Box 7. If the IRA is owned by a beneficiary, code 4, Death, should be entered in Box 7.
An IRA owner has recently reclaimed IRA assets that were distributed from his IRA to his state’s unclaimed property fund six months ago. May he roll over these assets to his IRA today?
Possibly. In October 2020, the IRS issued Revenue Procedure (Rev. Proc.) 2020-46, which builds on guidance found in Rev. Proc. 2016-47 that provided self-certification procedures for taxpayers to indicate that they qualify for an extended period of time to complete rollovers. Rev. Proc. 2020-46 modifies Rev. Proc. 2016-47 by adding another reason to the list of self-certification reasons: “a distribution was made to a state unclaimed property fund.” Thus, individuals who recover escheated retirement plan assets can use this self-certification to document their rolling over of such assets to an eligible plan. Self-certification applies only to the waiver of the 60-day rollover rule for a qualifying reason, such as recovery of an escheated IRA account; individuals cannot use this process on a distribution that is otherwise ineligible for rollover treatment, such as a required minimum distribution.
Rev. Procs. 2020-46 and 2016-47 apply to eligible rollovers from 401(a) plans, 403(a) and 403(b) annuity plans, governmental 457(b) plans, and IRAs.
