Electronic payment of withheld taxes

[Guest]

Two of my clients received notice last year that they must use EFTPS for all tax payments. To do this they would have to deposit the 20% withholding in to the employer checking account. Is this a prohibited transaction?

[Guest RS Vatalaro]

I can't answer your prohibited transaction question but you could take care of this issue by establishing a checking account in the name of the trust, at least that way the 20% taxes are not "reverting back to the employer." You would need another EFTPS registration form at the IRS for the add'l bank account (each EFTPS registration only supports one bank account).

[KJohnson]

The following is from the Reish and Luftman Technical Tips column. Of course this is IRS and not DOL:

Technical Tip 11: The following question and answer were from the IRS Q&A Session at the 1998 ASPA Annual Conference:

Due to new electronic tax payment rules (for tax withholding Form 945), many plans will have to pay 20% withholding tax electronically. Since many plans do not maintain bank accounts, is it okay to transfer the tax withheld (on distributions) to the sponsor's checking account, so payments may be made electronically? Any comments on prohibited transaction issues?

IRS Response: We believe this is acceptable and does not give rise to a prohibited transaction.

[Guest]

This sounds like a fiduciary violation of the trust requirement. And risky also. Why don't plans have their own checking accounts?

[Guest]

The reason for no checking account is the company has only 8 employees and does not want the expense.

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[Guest]

Thanks to everyone who helped on this. I have several 401(k) plans with companies of less than 15 employees. These small companies do not want the expense and bother of a seperate checking account.

Does anyone have any suggestions about the best way to handle withholding on these small companies? They may have only 1 distribution every third year or so.

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