rr-20-24.pdf

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RR-113583-19

Section 3405.--Special Rules for Pensions, Annuities, and Certain Other Deferred
Income
(Also, § 6047)

Rev. Rul. 2020-24 Withholding and Reporting With Respect to Payments From
Qualified Plans to State Unclaimed Property Funds

ISSUES
(1) Under the facts presented, is the payment of Individual C’s accrued benefit
from Plan X subject to federal income tax withholding under § 3405 of the Internal
Revenue Code?
(2) Is the payment from Plan X subject to reporting under § 6047?
FACTS
Employer M is the plan administrator of Plan X, a qualified retirement plan under
§ 401(a) that does not include designated Roth accounts under § 402A, hold employer
securities, or provide benefits described in § 104 (compensation for injuries or sickness)
or § 105 (amounts received under accident and health plans). Individual C, a U.S.
person under § 7701(a)(30)(A) with a calendar year taxable year, has an accrued
benefit in Plan X with a value of $900, has not made a withholding election under

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§ 3405 with respect to her benefit, and has no investment in the contract within the
meaning of § 72 with respect to her benefit. In 2020, Individual C’s accrued benefit (net
of any applicable withholding) is paid to the State J unclaimed property fund, a fund
under which a claim for property may be made by an owner.
1

LAW AND ANALYSIS
(1) Withholding
Section 3405 provides federal income tax withholding rules with respect to
designated distributions. Under § 3405(d), the payor or plan administrator shall
withhold from a designated distribution, and be liable for, payment of the tax required to
be withheld under § 3405. Under § 3405(e)(1)(A), the term “designated distribution”
means, except as provided in § 3405(e)(1)(B), any distribution or payment from or under
an employer deferred compensation plan, an individual retirement plan under
§ 7701(a)(37), or a commercial annuity. Under § 3405(e)(5), the term “employer
deferred compensation plan” includes any pension, annuity, profit-sharing, or stock
bonus plan, or other plan deferring the receipt of compensation. A qualified retirement
plan under § 401(a) is an employer deferred compensation plan.
Section 3405(e)(1)(B)(i), (iii), and (iv) provides exceptions to treatment as a
designated distribution with respect to amounts that are wages, amounts that are

1
This revenue ruling does not address whether the payment to the State J unclaimed property fund
otherwise complies with applicable law. For example, it does not address compliance with any search
requirements applicable under state law and does not address matters arising under Title I of the
Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829, as amended, for which
the Department of Labor has subject matter jurisdiction under Reorganization Plan No. 4 of 1978,
5 U.S.C. App.

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subject to withholding on nonresident aliens and foreign corporations,
2
and distributions
described in § 404(k)(2) relating to dividends on employer securities. None of these
exceptions apply under the facts presented. In addition, § 3405(e)(1)(B)(ii) provides
that a designated distribution does not include the portion of a distribution or payment it
is reasonable to believe is not includible in gross income. Under the facts presented, it
is not reasonable for Employer M to believe that the payment of any portion of Individual
C’s accrued benefit from Plan X is not includible in gross income.
Because none of the statutory exceptions from treatment as a designated
distribution in § 3405(e)(1)(B) apply to the payment of Individual C’s accrued benefit
from Plan X, the payment, including the amount withheld, is a designated distribution.
Accordingly, the payment is subject to federal income tax withholding under § 3405(d).
(2) Reporting
Section 6047(d) provides that the Secretary of the Treasury shall, by forms or
regulations, require the employer maintaining a plan from which designated distributions
(as defined in § 3405(e)(1)) may be made, or the plan administrator of that plan, to
make returns and reports regarding the plan. However, no such return or report may be
required with respect to distributions to any person during any year unless the
distributions aggregate $10 or more.

2
Under § 3405(e)(1)(B)(iii), a designated distribution does not include a payment that is subject to
withholding under the withholding rules applicable to payments to nonresident aliens and foreign
corporations. See § 1441 (Withholding of tax on nonresident aliens), § 1442 (Withholding of tax on
foreign corporations), and § 1.1441-4(b)(1)(ii).

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Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., is used to satisfy the reporting
obligations under § 6047(d). Under the 2020 instructions to Form 1099-R, a
Form 1099-R must be filed for each person to whom a designated distribution of $10 or
more has been made, and the total amount of the distribution (before income tax or
other withholding) must be reported in Box 1 of that form. In addition, under those
instructions, the federal income tax withheld must be reported in Box 4 of the
Form 1099-R.
The Plan X payment of Individual C’s accrued benefit, including both the amount
sent to the State J unclaimed property fund and the amount withheld, is a designated
distribution under § 3405(e)(1) that exceeds the reporting threshold. Accordingly,
Employer M is required to report that designated distribution in Box 1, and the federal
income tax withheld in Box 4, of the Form 1099-R for 2020.
HOLDINGS
(1) The payment of Individual C’s accrued benefit from Plan X is subject to
federal income tax withholding under § 3405.
(2) The payment from Plan X is subject to reporting under § 6047.
TRANSITION RELIEF
A person will not be treated as failing to comply with the withholding and
reporting requirements described in this revenue ruling with respect to payments made
before the earlier of January 1, 2022, or the date it becomes reasonably practicable for
the person to comply with those requirements.

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DRAFTING INFORMATION
The principal author of this revenue ruling is Angelique Carrington of the Office of
Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment
Taxes). Ms. Carrington may be reached at (202) 317-4148 (not a toll-free number).