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When does the distribution occur for 1099-R and withholding purposes when you interplead a benefit?


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The question is, suppose that A dies and it's not clear whether B or C is entitled to A's 401(k) account. The plan administrator decides to interplead the benefit into Federal court. Assume also (which may not be the case) that the interpleader rules require that the funds be deposited into the court. Finally, assume it takes a couple of years before the court reaches its decision.

Does this mean that a distribution has occurred for 1099-R and withholding purposes when the transfer of funds is made to the court? It seems to me that the only practical answer (although it is also not without complication, especially where RMDs may be involved) is that the court is the plan's agent and that reportable distributions for 1099-R and withholding purposes do not occur until the court cuts a check to B or C, but I cannot find any guidance on this. It certainly would be hard to tell B and C that either of them have income for Federal income tax purposes if neither of them has received any portion of A's account yet, and one of them will probably not ever receive any portion of it.

I'm hoping it turns out that we don't have to pay the funds into court in order to interplead, but that has not yet been ascertained, and so am posting this to see whether any of the BenefitsLink experts have had any hands-on experience with the issue.

I found the following discussion on BenefitsLink from 15 years ago:

Not a lot of analysis in the above post or, apparently, in the following 15 years, and I have not been able to find anything else on the topic.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Not to muddy the waters: If this were a DB plan, it's possible the benefit payable to B does not equal the benefit payable to C.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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1 hour ago, david rigby said:

Not to muddy the waters: If this were a DB plan, it's possible the benefit payable to B does not equal the benefit payable to C.

Good point, david rigby, but I'm not looking to muddy the waters at this point.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I haven’t looked to discern whether the statute and rule are clear or ambiguous about your question.

Would a Form 1099-R report issued before the distributee is known show in the “recipient’s name” box the United States’ court and in the “recipient’s TIN” box the omission of a taxpayer identification number?

Although courts nowadays favor text interpretations over purpose interpretations, a court might find such a report would be so useless to the Internal Revenue Service that an interpretation that the statute and rule require such reporting is incorrect or otherwise unsound.

Beyond your advice, perhaps there’s a way to get some comfort, or at least some showing that the payer/reporter (if your client has that responsibility) acted in good faith.

In the petition, consider asking not only for the court to decide the rightful distributee but also for the court’s declaratory judgment that the plan’s administrator or trustee ought not to file any Form 1099-R tax-information report until the court has decided the proper distributee (or the matter is settled and the interpleader case is ended).

(One would not ask this unless the payer/reporter, after thorough legal research, finds that the question is unsettled or otherwise doubtful.)

If the court grants that declaratory judgment, the IRS should not assert a penalty against the report for acting according to the court’s order. Or if the court grants no relief, the payer/reporter will have shown it was aware of the question about when and what to report, did reasonable legal research, and in good faith sought to get a confirmation of the answer.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Consider also checking Wright & Miller’s Federal Practice and Procedure treatise to see whether its part on interpleaders explains a convention about tax reporting for an amount paid into the court’s registry.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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My plan was to issue two 1099-R's, each showing a distribution of half the amount to reflect the actuarial probability of eventual receipt. 

Sorry. Feeble attempt at humor.

Thanks for all of your responses. They have confirmed my suspicion that (a) issuing 1099-R before the court has made its determination is impossible and not consistent with basic Federal income tax rules on when an individual has income and (b) there is surprisingly no guidance on this issue from IRS.

Which makes me think that maybe you don't actually have to deposit the funds with the court to interplead. Peter, your suggestion to check  Wright & Miller’ is very helpful and I will do that.

 

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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20 minutes ago, Luke Bailey said:

actuarial probability

 

21 minutes ago, Luke Bailey said:

attempt at humor

not words I expected to see in the same post Luke! I'd say leave such humor attempts to the actuaries, but ...

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Luke, could you avoid the 1099 question by:

  • segregating the $$ amount into a separate account (ie, not actually distributed), and
  • informing the court of such action, and
  • with distribution (and 1099) pending until the court makes its decision?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I don't think a distribution has occurred in the first place; there has been no transfer of the payable benefit to the participant(beneficiary(s)), another plan, or the PBGC.  The recipient does not have use of the funds.   The transfer to the court is to protect the value of the benefit and not expose it to undue market risk while the question is settled.  I would view the court as another custodian of Plan assets and continued to report it as an asset of the Plan.  At most, you could deem it as a payable and report the liability since the amount to be paid is known if its a DC plan.

@david rigby what amount would you even transfer for a pension benefit that is nothing more than an IOU until the moment it's actually paid?  Would you just grant the court a subordination agreement and then possibly escrow a 'reserve' amount that gets recalculated on each valuation date until actual payment? 

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44 minutes ago, Nate S said:

@david rigby what amount would you even transfer for a pension benefit that is nothing more than an IOU until the moment it's actually paid?  Would you just grant the court a subordination agreement and then possibly escrow a 'reserve' amount that gets recalculated on each valuation date until actual payment? 

If this is a DC plan (as Luke tells us), there is the presumption that the entire account balance is the death benefit, payable to (at least) one beneficiary.  Therefore, this is the amount that could be transferred to a court; no more, no less (unless I have overlooked some unusual circumstance). 

However, one of those unusual circumstance is that some DC plans include J&S payment forms; these are precisely the plans where the original B vs. C "conflict" could be relevant, so the precise death benefit is not knowable.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I get where you're coming from on this, Nate S., but in the absence of guidance I am not confident that if we cut a check to the court there has been no distribution from the 401(a) plan. I'm hoping it will turn out we won't have to cut the check until the court has reached its determination. The 60-day rollover window would also be a problem. The IRS does not seem to have covered this in the self-certification Rev. Proc. (2016-47), although they probably would have included this situation had they thought of it. Although I think the ultimate recipient could get the IRS to rule in a PLR to extend the period, that costs $10k.

david rigby, it is just the account. Interesting angle, though.

Thanks to both of you.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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