FAILURE TO WITHHOLD

[Guest JROSSITTER]

Is there anyway to correct a failure to withhold? It appears that (1) the plan administrator is still liable to pay the 20% to the IRS; (2)the employee's 1099R should show no witholding and he/she will receive no credit; and, therefore, the IRS will receive 40% of the distribution. Or could the plan show the 20% on the 1099R and recover this payment from the employee?

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[Guest T Hoffman]

How 'bout this? The plan administrator (the employer, I presume) is liable, would pay the 20%, report it on a W-2 or 1099 as income to the employee and as withheld taxes. However, the government has only gotten its 20%, right? What is wrong with this?

[Guest JROSSITTER]

I agree this is probably the best scenario, particularly because the employer might then be able to recover the 20% from the employee(voluntarily or involuntarily) under a theory of "unjust enrichment."

My concern is with Code Sections 6721 and 6722--failure to file correct information returns/payee statements, particularly the penalties for intentional misreporting--since, in fact, there was no withholding. However, in view of the equities involved, the risk is probably worth taking--even the IRS (if it ever came to their attention) might be sympathetic to the employer's quandary, at least if it was an isolated occurrence.

[Guest greymann]

From time to time, but not often, our affiliated trustee will fail to properly withhold, and I know of no instance when this has led to anything negative from the IRS. My experience has been that the IRS is not too involved with isolated withholding problems, so if this is isolated there probably is not much risk of detection.

[Guest Bill]

Look back at a thread posted in this topic on 10-1-98. The penalty for failing to file a 1099-R is $50. Failure to provide to participant is also subject to penalty but is waived if it's de-minimus (which I would consider it to be with 1 participant). The 1099 is not the big issue here, the failure to withhold could come back on the sponsor or whoever the sponsor has assigned to pay plan benefits.

[Guest JROSSITTER]

Thanks to all for your input. I agree with the consensus, but I just want everyone to know that although the normal penalties for incorrect reporting are nominal, there are significant penalties (10% of the amount involved) for "intentional disregard" in misreporting to both the IRS and to the payee. Code Sections 6721 and 6722.

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[Guest Bill]

You're correct, I was assuming that once you were aware of the error that it was being fixed and so that withholding would take place even if it was late.

[Disco Stu]

Sorry for jumping in at the tail end of this one, but...

In the first post, what are you referring to when you say that "It appears that (1) the plan administrator is still liable to pay the 20% to the IRS"?

My first thought on this subject is to agree with greymann. Why not just report the distribution on the 1099 as it happened...taxable with nothing withheld. I too have not heard of any consequences arising from failing to withhold...assuming this is an isolated incident.

[This message has been edited by Disco Stu (edited 02-18-99).]

[Guest JROSSITTER]

As I read the regs, in the absence of a direct rollover the employer/plan administrator is required to pay 20% of an eligible rollover distribution to the IRS whether or not it has actually withheld such amount from the participant's distribution.

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[Disco Stu]

I'm with you up until the point where you said "whether or not it has actually withheld such amount from the participant's distribution".

Could you refer me to the portion of the regs you are referring to that support this?

[Guest JROSSITTER]

See Code Section 3405(d)and Reg Section 31.3405©-1 (Q&A 4).