Failure to withhold

[Bird]

Plan has transferred most account from brokerage firm A to firm B. One account for a terminated participant lags behind; we track down the participant and tell firm A to transfer the funds to firm B.

Firm A, for reasons that I cannot begin to fathom (I guess total incompetence is a "reason"), pays everything to the participant, who cashes the check.

The participant is entitled to a distribution, and forms have already been completed electing a cash distribution, so at least we have the paperwork needed. And I think we have convinced the participant to return the unvested money (minor detail!).

As to the withholding...I don't think there are any real consequences to not doing it. I think the participant has some kind of legal claim to force the plan to pony up the amount not withheld, but then the plan would have a legal claim to recover the same amount, so it's a wash. I don't think the IRS will actually do anything about it; the 1099-R will be filed showing what actually happened (taxable distribution with no withholding).

Has anyone had experience with this? Is there any point in putting the brokerage firm on notice that if there are any consequences, the plan intends to hold them liable?

[J Simmons]

I would put brokerage firm A on notice that employer intends to hold A liable if there are consequences. It is conceivable that if the employee does not pay taxes on the distribution and the IRS cannot recover against employee that the IRS would turn and look to the plan that failed to withhold.

[Kevin C]

I was thinking the withholding liability would be with either the Trustee or the ERISA Plan Administrator, not the plan.

A quick search yielded the following:

35.3405-1T, Q&A 13

A-13. Q. Who must withhold?

A. Generally, the payor of a designated distribution must withhold, and is liable for payment of, the tax required to be withheld. However, in the case of a distribution from a plan described in section 401(a) (relating to pension, profit-sharing, and stock bonus plans), section 403(a) (relating to certain annuity plans), or section 301(d) of the Tax Reduction Act of 1975 (relating to certain employee stock ownership plans, sometimes called "TRASOP's"), the plan administrator must withhold, and is liable for payment of, the withheld tax unless he directs the payor to withhold the tax and furnishes the payor with any information that may be required by the Secretary in forms or regulations. This provision applies to qualified plans as well as once qualified plans that are no longer qualified. For a description of the material that the plan administrator must furnish to the payor, see question E-3.

I don't know if this has been updated.

Yes, I would definitely put the brokerage firm on notice that they will be held liable if there are problems.

[ERISAnut]

I think the bigger issue here is that the participant is subject to income taxes on the total taxable amount regardless of whether or not the 20% withholding. That same participant has to cover this with the IRS.

The Trustee's (or payor's) issue is with the IRS as well; irrespective of what the participant feels he is entitled to. Even if there were a 'pony up' amount, such amount would be taxable to the participant as well.

So, there are two distinct issues, both with the IRS; And the IRS will hold the respective parties accountable.