Reporting Escheated IRAs
By Jodie Norquist, CIP, CHSP
Many financial organizations struggle with how to handle IRAs that are left unclaimed or abandoned. You may feel that you have exhausted all efforts to locate missing IRA owners or beneficiaries. How do you handle these IRAs so that you can meet both your financial organization’s duty as a trustee or custodian and the need to “clean up” these inactive accounts?
Escheat, which is the transference of unclaimed property to a government entity, is primarily governed by state laws. So each state has its own laws that set procedures and timelines for reporting and reverting unclaimed or abandoned property to the state. Each financial organization should determine and set its own procedures to properly report and pay out unclaimed accounts.
First Step, Identify Abandoned IRAs
Section 2 of the Uniform Unclaimed Property Act (i.e., the Act, drafted by a national commission) provides guidance for IRAs (and other deposits at financial organizations) that are presumed abandoned. In general, accounts are presumed abandoned if the IRA owner has not communicated an interest in the account after three years following the date distributions are required to begin. These distributions could be required minimum distributions (RMDs) that IRA owners age 73 (as of 2023) or older must take each year, or payments required of IRA beneficiaries.
State escheat laws typically do not distinguish between IRAs and other accounts. If this is true in your state, then normal escheat rules apply to IRAs.
Escheat periods vary by state, but five to seven years is a common requirement to consider an IRA as abandoned. Some states do not start the escheat period until the IRA owner’s required beginning date (i.e., April 1 following the year the IRA owner attains RMD age).
Attempting to Locate Missing IRA Owners
This can be a challenge. While financial organizations must report abandoned or unclaimed accounts to the state administrator or treasurer each year, you must first inform the account owner at his last known address that your financial organization holds his account. You may have to find creative ways to attempt to find your missing IRA owners and beneficiaries. Search for their social media accounts or hire a company to track missing IRA owners down for you. Whatever method of searching you choose, keep detailed records of your efforts.
Reporting Abandoned IRAs to the State
If locating efforts fail, you must file a report with the state. Individual state laws dictate what information that financial organizations must provide. This report is generally due before November 1 of each year, which typically includes IRAs presumed abandoned as of June 30 of the same year.
States will often publish a notice titled “Notice of Names of Persons Appearing to be Owners of Abandoned Property,” later in the year. This notice is usually published in local newspapers that cover counties where the IRA owner’s last known address is located. This notice also informs how the property may be claimed. The state must also mail a notice to each missing IRA owner whose last known address is listed in the report.
Paying Unclaimed IRA Assets to the State
The Uniform Unclaimed Property Act states that within six months after the final date for filing the report, all abandoned property required to be reported must be paid or delivered to the proper state administrator. Your financial organization should complete and retain a withdrawal statement, detailing the reason for the distribution. In most states, the government takes custody, not title, of the property. Under the Act, the state waits three years, then sells the property (if other than cash) to the highest bidder at a public sale. If an owner subsequently makes a proper claim to an IRA, the state generally will pay or deliver the IRA to the owner.
The Act protects financial organizations that pay abandoned property in good faith. It also provides for criminal penalties for people who willfully violate the Act. Failure to report abandoned property is punishable as a misdemeanor offense. Failure to pay or deliver the property to the state as required is a gross misdemeanor offense.
Withholding and Reporting Escheated IRAs
In 2018, the IRS released Revenue Ruling 2018-17, which provides guidance on how financial organizations should report IRAs that they escheat to the state. In this ruling, the IRS verified that these distributions must be reported on the applicable year’s Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., using the IRA owner’s name and Social Security number. The revenue ruling states that these payments to the state are taxable distributions and subject to federal IRA withholding rules. As a result, your financial organization will need to provide the missing IRA owner with a withholding notice, although the IRS did not specify how to do this. Informal IRS guidance suggests that this requirement may be satisfied by providing the state with the withholding notice. Based on Rev. Rul. 2018-17, it also appears the state may not waive withholding on the IRA owner’s behalf.
Use code 1 for Traditional IRA owners under 59½ or code 7 for those who are age 59½ and older in Box 7 on Form 1099-R. While Rev. Rul. 2018-17 doesn’t address reporting for inherited IRAs, financial organizations should use code 4 to report a Traditional IRA death distribution on Form 1099-R in the beneficiary’s name and Social Security number. If you do not have the beneficiary’s Social Security number, leave the “Recipient’s identification number” box blank. Three distribution codes generally are used for Roth IRA distributions: codes J, Q, and T.
Escheated assets are subject to both federal and state withholding. If you have a withholding election on file for the IRA owner, you may use that withholding amount from the previous election. Otherwise, the federal default withholding rate is 10 percent. Check with your state revenue authorities to determine if there is an applicable state withholding requirement.
