Former employee dies put spouse keeps cashing NQDC checks

[Steamboat]

A former employee had been receiving annual payments from her NQDC plan, and we were issuing her W-2s. We just learned the former employee died a couple years ago. The spouse has continued to cash her checks. How do we correct the tax reporting from W-2 to the deceased former employee to 1099-MISC to her spouse? 

[Peter Gulia]

Before adjusting any tax-information reporting, are there other issues to sort out?

Considering the plan’s provisions:

Did the participant have a right to payments that continue after the participant’s death?

If so, is the participant’s spouse the participant’s beneficiary?

If the after-death payments did not belong to the person who deposited or negotiated the checks, should the employer pursue its remedies against a bank that processed the checks?

If the after-death payments did not belong to the person who deposited or negotiated the checks, should the employer pursue its remedies against the person who made false statements?

[Steamboat]

Thank you! No other issues. The payments continue to be paid to her spouse beneficiary so it's only the tax reporting that is off. The spouse should be getting 1099s to report the benefit. 

[Paul I]

You can correct W-2s for the current year and up to three prior years by filing Form W-2c with a Form W-3c.  The Social Security Administration will be informed of the changes and likely will correct the earnings history associated with the deceased.  This may or may not affect the spouse's benefit depending on whether the spouse is or will be have benefits based on the deceased's earnings history.

Hopefully, you do not have retirement plans that include considering in the plan definition of compensation distributions from NQDCs, or considering Social Security benefits in a defined benefit plan formula.  I would expect the service providers for those plans would be aware of the death of a participant and would have questioned having W-2 income reported on plan census data.

I do wonder if or how the spouse may have been reporting W-2 income reported for the deceased on the spouse's personal tax return.  That can be a whole other mess, but it is not really your mess to sort out.

[HCE]

On 3/10/2023 at 8:50 AM, Paul I said:

You can correct W-2s for the current year and up to three prior years by filing Form W-2c with a Form W-3c.  The Social Security Administration will be informed of the changes and likely will correct the earnings history associated with the deceased.  This may or may not affect the spouse's benefit depending on whether the spouse is or will be have benefits based on the deceased's earnings history.

Hopefully, you do not have retirement plans that include considering in the plan definition of compensation distributions from NQDCs, or considering Social Security benefits in a defined benefit plan formula.  I would expect the service providers for those plans would be aware of the death of a participant and would have questioned having W-2 income reported on plan census data.

I do wonder if or how the spouse may have been reporting W-2 income reported for the deceased on the spouse's personal tax return.  That can be a whole other mess, but it is not really your mess to sort out.

Paul -

Just curious.  If there are W-2 issues prior to the 3 year cut off, should we just leave those alone?  Say I underreported income to the federal government for my employees for the last 8 years.  Should I just correct the last 3, and leave anything beyond that alone?

[Paul I]

For starters, I suggest taking a look at General Instructions for Forms W-2 and W-3 (2023) page 14.  It gets complicated depending upon the situation and the amounts involved.   There are some breaks available if the amounts are small or if you are a small business.  Also, do not overlook the ripple effects on State and Local reporting. 

The worst thing is to ignore the issue.  Personally, I would seek legal advice with knowledge of the applicable taxing authorities.  If there are compensation-based benefit plans including retirement, and health and welfare, have them look at the implications on under-reported income on those plans as well.