Qualified Plan Distributions

[Gary]

Say a client has a terminated employee with a 100% vested profit sharing account of $10,000.

The terminated participant is under age 55 and wants to receive a lump sum in cash.

The name of the profit sharing plan is the "ABC Plan".

Let's say that the plan assets are in Schwab retirement accounts.

My understanding of the logistics is as follows:

The ABC plan makes a check to the terminated employee for $8,000.

The ABC plan makes a check to the IRS for $2,000 (for the 20% withholding).

When the former employee prepares his Form 1040 he declares $10,000 of taxable income, $2,000 of taxes paid and an additional tax of $1,000 (10% penalty) owed.

The former employee completes form 1099R and Form 5329.

Any comments on my above understanding?

If the above is correct, then does the employer instruct Schwab to cut the checks and mail them to the employer for delivery to the former employee and the IRS?

What paper work is provided to the IRS? Does it go to the same address that payroll taxes are sent?

What paperwork is sent to the participant? A check for $8,000 and a note stating that $2,000 was withheld to the IRS and that an additional $1,000 penalty tax is owed?

Get the picture? I need some explanation of the mechanics of what should be an elementary task.

Thank you.

[david rigby]

Probably, the trustee will make the payments: check for $8K to EE and $2K to IRS. If Schwab is the trustee, they will cut the checks. If not, they will transmit the funds to the trustee.

Then, the EE will get a 1099R (from the trustee) showing a distribution of $10K with withholding of $2K.

The EE may have a 10% excise tax, determined and paid with the 1040 filing. Or maybe not. This is not the responsibility of the trustee or plan administrator or TPA.

Don't forget the Special Tax Notice. Perhaps the ER should refer the EE to IRS publications 575 and 590.

But, of course, I'm not in the business of giving legal or tax advice.

[masteff]

Need to back up a step or two as David's right on the Special Tax Notice should be provided prior to the distribution.

EE requests to make a distibution.

Plan/ER provides Special Tax Notice and forms or directions to initiate the distribution.

EE completes forms or alternate means (such as electronic, phone, etc).

Now we pick up w/ your sequence.

One question is whether your trust agreement w/ Schwab includes tax withholding service (some trustees, generally for a small fee, will handle remitting withholding taxes and preparation of the proper forms).

One correction: the Plan (or trustee if paying for a tax service) prepares form 1099-R and form 1098... one copy of 1099-R is sent to the EE and the others are sent to the Service.

The EE gets paperwork three times in total. 1) at the beginning and includes the special tax notice. 2) the check and stub, which ought to reflect the gross distribution, less withholding (do not mention the extra 10% on the stub; if in doubt then enclose another copy of the special tax notice which more than covers the topic). 3) after the first of the year, form 1099-R.

Now, if you (or someone else) is a TPA between ABC plan and Schwab, then the participant may complete a distribution form that goes to the TPA and then the plan sponsor/trustee may complete another form that instructs Schwab to process the distribution (and has a copy of the participant's form attached).

[Gary]

Now let's focus on the $2,000 that is to get paid to IRS.

Must Form 945 and 945-V accompany the payment?

Is this done now or just after the calendar year?

As far as I know the Form 945 for 2008 may not even exist.

Thanks.

[david rigby]

I think the 945 is the annual filing, but there is another form (8109?) that is filed when the $ is transmitted to the IRS. The transmittal requirements are (probably) similar to those for other withholding, so it will be deposited into an IRS account within a few days after the payment date, even if the annual filing is not for several months. Check the IRS forms site.

[K2retire]

The ABC plan makes a check to the terminated employee for $8,000.

The ABC plan makes a check to the IRS for $2,000 (for the 20% withholding).

When the former employee prepares his Form 1040 he declares $10,000 of taxable income, $2,000 of taxes paid and an additional tax of $1,000 (10% penalty) owed.

The 20% withholding is the mandatory rate of withholding. The actual tax due may be more or less than 20%. If the distribution is subject to the 10% early withdrawal penalty, 20% is likely to be too little (since few people are in a 10% tax bracket). But the actual amount due is not of concern to the employer or the plan.

[mwyatt]

Note that the IRS is moving towards electronic transmission of withholding (instead of a check made payable to the Federal Depository Bank being deposited with the 8109B).

Three points to note:

1) DO NOT HAVE THE WITHHOLDING CHECK MADE PAYABLE TO THE US TREASURY (sorry for the caps, but we had a client where this happened with a 90k withholding payment and the IRS was kind enough to assess a 10% penalty, you do the math). Check is paid to the Federal Depository Bank that the plan sponsor uses for regular tax withholding.

2) Notice that you haven't even brought up state tax withholding. Check this out as it can be a major pain in the rear (here in MA once you do it your client has to continue quarterly filings even if no withholding payable in the period).

3) Plan sponsor, not participant, is responsible for 1099R preparation.

Also, the 10% excise tax doesn't necessarily apply in that the participant still has 60 days to rollover from date of distribution to an IRA (of course they didn't think it out too well if that was their intent as they have to come up with the money withheld to rollover thanks to UCA '92).

[Bird]

There are two ways that I know of to get the $2,000 to the IRS -

1) Have the plan write a check to the plan sponsor, and then have the plan sponsor write a check to its bank and make the tax deposit using form 8109 (or 8109-B ("blank") which is what we usually use. The bank will not take a check from another institution because cleared funds must be available for the deposit. It's definitely OK to run this type of payment through the sponsor although I don't have a cite handy.

2) Have the plan write a check to "Financial Agent" and mail it to Financial Agent, Federal Tax Deposit Processing, PO Box 970030, St. Louis, MO, 63197, along with the 8109-B. That's in the instructions on the back of the 8109-B and we've been doing it lately and it seems to work.

Getting an 8109-B can be a challenge. It has the special blue drop-out ink so you can't download it. I think you can wade through the phone ordering system, or you can write to the IRS and ask for a small supply (<50) from: IRS, Eastern Area Distribution Center, PO Box 85074, Richmond, VA 23261-5074. Just write a letter asking for some forms and explain that they are for tax withholding on pension plans and that you assist in the preparation of returns. It takes about three weeks. And your deposit is generally due by the 15th of the month following withholding.

If anyone knows of a better way to get the forms please post.

Yes, 945 is an annual form; it's filed to reconcile deposits made during the year. Make sure that you get the months the withholding is for recorded properly, and deposited timely, because they do check. (Kind of amusing how they zero in on "bright line" items, no matter how trivial, but I digress.)

I believe you can make a deposit with the 945 if the amount due is less than $500.*

*Edit - I think this is now $2,500.

Note that the IRS is moving towards electronic transmission of withholding (instead of a check made payable to the Federal Depository Bank being deposited with the 8109B).

"Moving towards" as in IRS (glacial) terms or we have to pay attention?

DO NOT HAVE THE WITHHOLDING CHECK MADE PAYABLE TO THE US TREASURY (sorry for the caps, but we had a client where this happened with a 90k withholding payment and the IRS was kind enough to assess a 10% penalty, you do the math).

You mean that the improperly issued check had to be reissued and it caused a delay in the deposit that resulted in penalties? The very fact that the check was payable to US Treasury isn't cause for a penalty, I hope?!

[Guest RBlaine]

There are two ways that I know of to get the $2,000 to the IRS -

1) Have the plan write a check to the plan sponsor, and then have the plan sponsor write a check to its bank and make the tax deposit using form 8109 (or 8109-B ("blank") which is what we usually use. The bank will not take a check from another institution because cleared funds must be available for the deposit. It's definitely OK to run this type of payment through the sponsor although I don't have a cite handy.

2) Have the plan write a check to "Financial Agent" and mail it to Financial Agent, Federal Tax Deposit Processing, PO Box 970030, St. Louis, MO, 63197, along with the 8109-B. That's in the instructions on the back of the 8109-B and we've been doing it lately and it seems to work.

Getting an 8109-B can be a challenge. It has the special blue drop-out ink so you can't download it. I think you can wade through the phone ordering system, or you can write to the IRS and ask for a small supply (<50) from: IRS, Eastern Area Distribution Center, PO Box 85074, Richmond, VA 23261-5074. Just write a letter asking for some forms and explain that they are for tax withholding on pension plans and that you assist in the preparation of returns. It takes about three weeks. And your deposit is generally due by the 15th of the month following withholding.

If anyone knows of a better way to get the forms please post.

I'd like to see the cite saying #1 is OK with the IRS. I know lots of people use it, but I don't remember ever seeing anything positive about it from the IRS.

#2 is the cleanest way to do it. You should have a federal office in your city (or a nearby one) where you can pick up tax forms. You should be able to get a few (5 or less) of the 8109-B from there and order more from the IRS for you to have in the future.

[mwyatt]

You mean that the improperly issued check had to be reissued and it caused a delay in the deposit that resulted in penalties? The very fact that the check was payable to US Treasury isn't cause for a penalty, I hope?!

$9,000 penalty assessed by the IRS (which we had to expend a considerable amount of time to get abated).

[Gary]

Thanks.

It seems we're making progress with a process that is more complicated (or detailed) than it should be.

I am looking at the 8109-B form and it asks that the Employer Identification Number be entered.

Should this include the trust ID#, since that is where the payment is from or the employer ID#?

I realize the form displays the generic employer id#.

Thanks.

[GBurns]

Gary

Why are you doing this rather than having it done by the Trustee/Schwab ?

[Gary]

Good point.

I used Schwab for discussion purposes, not realizing that it was necessarily them whou would do this.

The client has some private investment company and I don't think they have a clue, but I'll check into that.

Thanks.

[Bird]

Use the trust ID #.

I'm under the impression that this is a small plan, and the owner is the trustee, not Schwab. The reality in this case is that the TPA has to do virtually all the work in terms of preparing the forms - everything except actually writing the check. Another alternative is to contact Penchecks/Benepay - you give them one check for the total and they can handle the withholding and reporting for something like $40.

Also, note my edit to prior post - it appears the threshold for paying a balance due with Form 945 is now $2,500, so as the facts are presented, you could actually just send a check in at the end of the year! I'm still hesitant to do that because later withholding could put you over the threshold.

$9,000 penalty assessed by the IRS (which we had to expend a considerable amount of time to get abated).

But for what wrongdoing? I still don't get it.

[mwyatt]

Check is to be paid to the plan sponsor's Federal Depository Bank. In this case the client sent the check to the IRS along with the 945, paid to the US Treasury. This isn't the correct procedure and the IRS assessed a 10% penalty.