Does a plan tax-report payments on Form 1099-MISC?

[Peter Gulia]

When a retirement plan's trust (not the employer) pays the plan's service provider - such as an actuary, a certified public accountant, or a lawyer, does the plan's trustee or administrator issue a Form 1099-MISC to tax-report the amount paid to each service provider?

[jpod]

Assuming the payee is a person with respect to whom a payor is required to file a 1099-MISC (e.g., an unincorporated sole proprietor), why do you have any doubt about this? Aren't the instructions clear that a qualified plan is required to file them? Ordinarily it should be the trustee's responsibility but the trust agreement may kick that back to the settlor.

[Peter Gulia]

I don't have a doubt about what the law requires; rather, I'm wondering how widespread the noncompliance is.

What's our guess about how many trustee/administrators don't know that they're obligated to do this?

[My 2 cents]

In many instances, the service provider is a corporation or partnership, and the fees are not paid directly to an individual. My guess would be that issuance of a 1099-MISC is only appropriate when the fees are being paid directly to an individual (who would then have to report that income on their individual taxes, probably as self-employment income). I wouldn't know what kind of reporting is required of the plan or trustees when the fees are paid to the employer of the individual providing the services and that individual is paid a combination of salary and bonuses by their employer. All I know on the subject is that the individual providing the services who is employed by the company being paid for those services is likely to have any or all income related to those services reported on a Form W-2 issued by their employer. This is the case even if the services are legally considered to be provided by the designated individual (for example, if we are talking about a defined benefit plan's enrolled actuary) and not by the employer of that individual.

[Peter Gulia]

The rule on reporting nonemployee compensation refers not only to payments to an individual natural person but also to payments to a partnership (including a limited-liability company treated as a partnership). These are kinds of business organizations often used by professional-services firms.

Further, the general rule for not being required to report a payment to a corporation has some exceptions; these include payments to lawyers.

How often do we see a 5500 that reports payments to accountants and lawyers but no 1099-MISC on any of those payments?

[Mike Preston]

Very few of our clients pay for legal or accounting services from the plan. Of those that do, the folks that they pay are upstanding tax-paying citizens that dutifully report all of the income they receive. Perhaps that is why enforcement in this area has been non-existent. Without a history of the IRS coming after a pension trust for 1099 non-compliance and with a maximum penalty of $250 per 1099, I completely understand why the industry hasn't made it a priority.

[Peter Gulia]

Mike Preston, thank you for the perspective.

Your observation about professional-services firms' honesty as taxpayers is how I first saw this issue years ago (and thought about it yesterday). I've seen business tax returns in which substantially all of the declared receipts had not been 1099-reported.

And big businesses too miss this.

[aGordeno]

I would say, there's not much room for doubts. And it's really is, you do need to issue 1099-MISC exactly to those persons. I prefer to use this service for such purposes https://1099-misc-form.pdffiller.com/ yet this one is paid, there is about a dozen of them around.