1099 When Plan Pays Participant Tax Levy?

[Guest Scott McHenry]

Participant was eligible for distribution from 401(k) Profit Sharing Plan. Plan Administrator receives Notice of Levy on Wages, Salary, and Other Income. Plan Administrator pays amount of distribution to IRS. Assume distribution amount is $1,000.

Assume distribution proceeds mailed to IRS address on Notice of Levy.

Question on 1099 details:

(A) Should 1099 show taxable income of $1,000 with $1,000 taxes withheld? This would cause potential IRS 945 Notice in future since amount was not sent with 8109 tax withholding coupon. Or

(B) Should 1099 show taxable income of $1,000 with $0 taxes withheld?

[E as in ERISA]

The amounts that show up in the withholding box would typically be reported as a tax payment on the person's current year Form 1040. And I think that the $1,000 was clearly being applied to past year's tax liabilities and the participant should not be allowed to credit it against current year liabilities. So I would assume that it shouldn't be reported as withholding.

[Mary Kay Foss]

I agree with Katherine. If the participant is under age 59 1/2, the 1099-R should have a "2" in Box 7 because an IRS tax levy is an exception to the imposition of the 10% penalty.

[jpod]

There should have been 20% withholding. The gross distribution should have been $1,250, with $250 deposited as current year's withholding and $1,000 going to IRS at the address indicated in the levy notice.

By the way, are you sure the IRS wanted to levy on the 401(k) plan account? Legally, it can do that, but they have a longstanding policy of generally not doing that. Just because the levy was addressed to the employer does not mean it is broad enough to cover the 401(k) plan simply because the employer is the plan administrator.

[Guest b2kates]

I agree with jpod, normally IRS will issue Lien but not execute Levy until participant is in pay status.

further to be valid there are very specific guidelines that the IRS must satisfy to levy against a plan.

[Guest Scott McHenry]

Thanks for the responses.

Legal counsel advised plan administrator to pay IRS entire amount.

My question was in regards to the 1099 reporting.