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IRAs and Escheatment Fees


Guest LeslieMM
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Guest LeslieMM

We recently had a situation involving an IRA that was eligible for escheatment under NY state law. NY requires that as part of due diligence we attempt to notify the customer by mail, and then if that is unsuccessful, they also require that we place a notice in various newpapers. They allow the expense of placing the notice to be charged to the customer. We were successful in locating the customer after placing the notices and are now passing the expense along to the customer. Is anyone familiar with how we should handle the IRS reporting of the debit to the customer's IRA for the expense of publishing the required newpaper notices? Would this be reportable as a distribution, or would it be a non-reportable fee transaction?

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I agree. Note, however, that the U.S. Department of Labor believes that ERISA preempts state escheat laws as applied to ERISA-covered plans (Advisory Opinion 94-41A). If the IRA is connected with an ERISA covered SEP, then arguably no esheat is permitted.

In addition, the IRS has a letter forwarding program, see Revenue Procedure 94-22

Rev. Proc. 94-22

SECTION 1. PURPOSE

This revenue procedure provides instructions and information on the Internal Revenue Service's use of the letter forwarding program. This program is made available to private individuals, companies and organizations, as well as state and federal agencies who are attempting to locate missing individuals. This program may be useful in particular to Plan Administrators or sponsors of qualified retirement plans who are attempting to locate plan participants.

SEC. 2. BACKGROUND

Policy Statement P-1-187 has established a program whereby the Service will forward a letter to an unlocatable individual on behalf of a private individual, company or government agency. The purpose must fall under a humane situation or consist of beneficial information which could not otherwise be relayed to the individual.

SEC. 3. SCOPE

The Service will forward letters that serve a "humane purpose," (e.g., from a family member who is trying to reunite with a relative, or from a company or organization who controls assets that may be due a taxpayer, including Plan Administrators or sponsors of qualified retirement plans who are attempting to locate missing plan participants). The Service will also forward letters for state and federal agencies to be of assistance in locating an individual. The Service will not attempt to trace family trees, nor will it forward letters seeking reparation. Letter forwarding is offered/performed only if it will not interrupt other Service activities or conflict with prior Service commitments. In no case is confidential tax information, such as an address or even the fact an address exists in Service files, disclosed to the requester.

SEC. 4. PROCEDURE

01. The requester should submit a written request briefly explaining the need for letter forwarding, the social forwarded. The SSN is the key element used to access the appropriate tax account and retrieve a mailing address. Therefore, the SSN for the missing individual must be furnished by the requester. If no SSN is furnished, the request cannot be processed.

02. If an address for the recipient is located, the letter will be forwarded in a Service envelope. The recipient will be advised that (1) the Service is forwarding the letter in accordance with current policy; (2) the Service has not divulged the recipient's address, nor any other tax information, or the fact that the letter has even been forwarded; (3) the Service has no involvement in the matter aside from forwarding the letter; and (4) the decision of whether to respond is entirely up to the recipient.

03. The Service cannot provide the requester with information concerning the results of its efforts. The requester will only be advised that we will attempt to forward the letter if an address for the individual is located. If the requester provides their most current address for a recipient, and it is the same address as in Service files, the Service will not forward the letter. Furthermore, all undeliverables will be destroyed.

04. Requests for letter forwarding assistance involving 49 or fewer recipients should be forwarded to the attention of the Disclosure Officer at the Service's district office nearest the requester. (Where the recipient last resided is irrelevant under this program. A complete listing of addresses for the district offices can be found in the Service's Appendix B of 31 CFR Part I, and are also listed in local telephone directories. Handling of these requests will be based on overall workload of the Disclosure Officer (see Sec. 2. Background). There is no charge for this service.

05. Requests involving 50 or more potential recipients, including multiple requests from a single entity that can reasonably be aggregated to meet the 50 recipient threshold, will be processed under Project 753, Computerized Mailout Program. Project 753 is performed on a First-in first-out request basis. Mailouts are "queued" at our service centers for processing. Generally, it will take 90 days from the Service's acknowledgement of the request, before the mailout can be performed. The requester will be charged for this service. The charge for Project 753 requests is subject to change but currently is approximately a flat $1,750.00 fee per request, plus $.01 per address search, and $.50 per letter forwarded.

06. Requests for service under Project 753 should be sent to; Internal Revenue Service, Director, Office of Disclosure, CP:EX:D - Room 1603, 1111 Constitution Avenue, NW, Washington, DC 20224.

The request should contain (1) a brief explanation of the need for letter forwarding; (2) an approximate number of potential recipients; (3) a statement that the requester has the SSN for each individual, and is aware there is a charge for this service (although the SSNs are required to be submitted on magnetic tape for processing, the tape will be requested once a reimbursable contract has been issued by the Service); and (4) one copy of the letter to be forwarded. It should be general in nature (not individually addressed because the Service cannot associate with specific envelopes); no more than three typewritten pages; and contain the following disclaimer language:

"In accordance with current policy the Internal Revenue Service has agreed to forward this letter because we do not have your current address. The Service has not disclosed your address or any other tax information and has no involvement in the matter aside from forwarding this letter."

This statement should be conspicuously placed in the letter, preferably in bold print and/or in the opening to immediately catch the attention of the recipient.

SEC. 5. EFFECTIVE DATE --Concurrent with the date of publication.

SEC. 6. DRAFTING INFORMATION --The principal author of this revenue procedure is Connie Robinson of the Office of Disclosure. For further information concerning letter forwarding procedures, please contact the local Disclosure Officer. Questions involving 50 or more recipients may also be directed to Ms. Robinson at (202) 622-6210.

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I dont understand how state escheat laws would be prempted from applying to a SEP plan funded by custodial accounts or annuities which are exempt from the nonalienation and fiduciary provisions of ERISA (ERISA 201(a)(6) and 403(b)(3)), when IRAs are expressly subject to state laws including escheat. Also SEPS are not subject to QDROs or spousal consent provisions. There is no difference between employer contributions which are deposited in a SEP IRA and an IRA which holds a distribution from a qualified plan. If the rollover IRA is subject to state laws including escheat why not the SEP IRA?

mjb

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It is possible that ERISA Section 514© prempts the state's law. And ERISA Section 206(d) would then prohibit the escheat. Some state have case law, other's don't. But the Advisory Opinion can't be ignored if the SEP-IRA is an ERISA covered plan. I'm only the messenger. The Advisory Opinion is reproduced below.

An IRA is subject to the PT rules under the Code. I think that an ERISA covered SEP (which would include the IRAs) are also subject to the PT rules under ERISA (see ERISA Section 404, and the DOL has granted exemptions therefrom).

ERISA Section 403(b)(3) only exempt certain IRAs from having to establish a formal trust. Did you mean to cite something else?

PWBA Office of Regulations and Interpretations

Advisory Opinion

December 7, 1994

Mr. Thomas R. Giltner

Cox & Smith Incorporated

112 East Pecan Street, Suite 2000

San Antonio, Texas 78205

  94-41A

ERISA SECTION

514(a) 

Dear Mr. Giltner:

This is in reply to your request for an advisory opinion regarding the applicability of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether section 514(a) of Title I of ERISA preempts the application of the Texas Unclaimed Property Statutes (Tex. Prop. Code Ann. Title 6 (West 1985)), with the result that the State of Texas may not assume custody over unclaimed benefits of those participants in the Luby's Cafeterias, Inc. Employees Profit-Sharing and Retirement Trust (the Plan) who cannot be located.

You advise that Luby's Cafeterias, Inc. (the Company) sponsors the Plan for its eligible employees. You further advise that, in the normal operation of the Plan, the plan administrator has occasionally been unable to locate a participant or beneficiary entitled to a distribution of retirement benefits. You interpret Section 7.10 of the plan document, which provides a procedure in the event a participant or beneficiary fails to claim a distribution, to permit or require your current practice in such circumstances, which you describe as follows. If a distributee fails to claim a distribution under the plan, the amount of the unclaimed benefit is transferred to an account styled "Terminated Employees' Account," which is an account segregated from the Plan's other bank accounts, but is an account of the Plan.1 The Plan maintains records to indicate the amount of each "lost" participant's or beneficiary's interest in the account. If a lost participant or beneficiary is later located, his or her benefits are paid from the Plan's main account, which is then reimbursed from the Terminated Employees' Account. If a lost participant or beneficiary is not located within four years, you represent that his or her share in the Terminated Employees' Account is then transferred to the Plan's main account. If the lost participant or beneficiary is located at any time after this transfer occurs, you represent that his or her benefits are reinstated and paid by the Plan.

In your request, you further assert that Section 7.10 of the Plan, as interpreted above, fully complies with Treasury Regulation section 1.411(a)-4(b)(6), which provides:

(b) Special rules. For purposes of paragraph (a)

of this section, a right is not treated as forfeitable--

. . . .

(6) Lost beneficiary: escheat. In the case of a benefit which is payable, merely because the benefit is forfeitable on account of the inability to find the participant or beneficiary to whom payment is due, provided that the plan provides for reinstatement of the benefit if a claim is made by the participant or beneficiary for the forfeited benefit. In addition, a benefit which is lost by reason of escheat under applicable state law is not treated as a forfeiture.

You further advise that § 72.101 of the Texas Unclaimed

Property Statutes provides:

§ 72.101. Personal Property Subject to Escheat

Personal property, other than traveler's checks, is presumed abandoned and subject to escheat if, for longer than seven years:

(1) the existence and location of the owner of the property is unknown to the holder of the property:

(2) according to the knowledge and records of the holder of the property, a claim to the property has not been asserted or an act of ownership of the property has not been exercised: and

(3) a will of the owner of the property has not been recorded or probated in the county in which the property is located.

Section 514(a) of Title I of ERISA provides:

(a) Supersedure; effective date. Except as provided in subsection (b) of this section, the provisions of this title and title IV shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) and not exempt under section 4(b).

Section 514(a) does not merely preempt state laws that conflict with Title I of ERISA, but broadly preempts all state laws related to employee benefit plans. The reasons for the broad preemption of state laws under ERISA were succinctly stated by Senator Javits, a major sponsor and floor manager of the bill that became ERISA, during its final consideration:

Both House and Senate bills provided for preemption of State law but -- with one major exception appearing in the House Bill -- defined the perimeters of preemption in relation to the areas regulated by the bill. Such a formulation raised the possibility of endless litigation over the validity of State action that might impinge on Federal regulation, as well as opening the door to multiple and potentially conflicting State laws hastily contrived to deal with some particular aspect of private welfare or pension plans not clearly connected to the Federal scheme.

Although the desirability of further regulation -- at either the State or Federal level -- undoubtedly warrants further attention, on balance, the emergence of a comprehensive and pervasive Federal interest and the interests of uniformity with respect to interstate plans required -- but for certain exceptions -- the displacement of State action in the field of private employee benefit programs. (120 Cong. Rec. S15751 (daily ed. Aug 22, 1974)).

It is the view of the Department of Labor (the Department) that, if the above-quoted section of the Texas Unclaimed Property Statutes were applied to require the Plan to pay to the State amounts held in the Terminated Employees' Account, or in other accounts of the Plan, pursuant to the procedures described above, then such application of the section would be preempted under section 514(a) of ERISA.2 Such an application of the State escheat law would directly affect the core functions of the Plan by reducing, through the escheat, the amount of plan assets held in trust for the benefit of all participants and beneficiaries of the Plan.3Moreover, because the statute at issue is not a law regulating insurance, banking or securities, it is not saved from preemption under section 514(b)(2).4

This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions.

Sincerely,

ROBERT J. DOYLE

Director of Regulations

and Interpretations

1 You represent that, when a distribution is for benefits valued at less than $3,500, the plan trustee mails a check to the last known address of the unlocated participant. If the check is not cashed after a reasonable period of time (presumably no more than a few months), the trustee cancels the check and transfers the same amount to the Terminated Employees' Account.

2 In Opinion 78-32A (December 22, 1978), the Department concluded that a provision of the Illinois Uniform Disposition of Property Act was preempted as applied to employee benefit plans. In Opinion 79-30A (May 14, 1979) the Department reached the same conclusion with respect to a provision of California's Unclaimed Property Law that expressly referred to employee benefit trust dispositions. In Opinion 83-39A (July 29, 1983), the Department found that a section of the New York Abandoned Property Law, which addressed the escheat of "nclaimed insurance proceeds other than life insurance," was saved from preemption under ERISA § 514(b)(a)(A) as a law regulating insurance.

3 In our view, the decision of the United States Court of Appeals for the Second Circuit in Aetna Life Ins. v. Borges, 869 F.2d 142 (2d Cir. 1989), is clearly distinguishable. In that case, the court considered the application of a state escheat law to amounts held in reserve by an insurance company to cover benefit checks issued pursuant to an insurance contract with an employer to provide welfare benefits, which checks were never presented by the participant or beneficiary for payment. The court found that the application of the escheat law in those circumstances would have only an indirect economic and administrative impact on the plan that was too remote and tangential to trigger preemption.

4 We note that Treasury Regulation § 1.411(a)-4(b)(6) provides that a benefit "lost by reason of escheat under applicable state law" will not be treated as an impermissible forfeiture under Internal Revenue Code § 411(a). This regulation, however, provides no guidance as to whether a particular application of state escheat law is preempted under ERISA § 514.

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ERISA 514 only preempts state laws relating to an ERISA plan. The Conference Report to the 1978 tax act clearly states that "contributions to SEPs would be subject to the usual rules for IRAs", not qualified plans. As I stated previously, Part 2 of ERISA which prohibits alienation of benefits does not apply to IRAs.

I don’t understand the reference to the PT rules of ERISA. Under Reorganizaton Plan no. 4 of 1978, interpretation of all PT matters involving both quaified plans and IRAs under both the IRC and ERISA was transferred to the DOL. The fact that the DOL renders opinions on PT issues for IRAs does not make the IRA a pension plan subject to ERISA. If the spousal consent and QDRO provisions do not apply to SEPs why would SEPs be regarded as plans subject to the non alienation provisions of ERISA?

It is inconsistent to assert that SEP contributions to a IRA are exempt from state escheat laws because they are employer contributions to a plan subject to ERISA but that distributions from a plan subject to ERISA which are rolled over to an IRA are subject to state laws including escheat. But then I am not just a messenger.

mjb

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Guest P A Weick

Last year the Sixth Circuit in an unreported case (Lampkins vs. Golden, 2002 US App LEXIS 900) held that while ERISA Section 206(d)'s anti-alienation rules do not apply to a SEP, a state law exempting SEPs from garnishment was preempted under ERISA Section 514(a). The result is based on a real close reading of the rules, and I am not sure I agree with it. Still, three federal judges saw it that way, so by extension of their thinking, maybe the state unclaimed funds rules are preempted for SEPs.

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The problem with unreported cases is that they cannot be cited as precedent usually because they are not well researched or thought out. Second, under the legislative history of the 1978 Tax Act SEPs are subject to the usual rules for IRAs which exempts them from annual reports, participation, vesting, spousal consent, nonalienation, funding, fiduciary responsibility and benefit claims procedures of ERISA. So it is somewhat ridiculous for a court to hold that the only substantive provision of ERISA which applies to SEPs is the provision that preempts state laws which protect IRAs from creditors.

mjb

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