small plan termination. taxes not withheld

[Lori H]

PSP is terminating. However, the plan sponsor did not withhold 20% from distributions. There are residual earnings that are left to be distributed but not enough to cover the taxes. Do you instruct the participants to cut a check to the plan sponsor for the taxes or are do they report it on their personal 2016 tax return?

[Bird]

Let's put it this way - if you leave things as they are, you report the full amounts on 1099-Rs and report no withholding. The plan failed to withhold, so the participants could demand that the plan pay the withholding, but then the plan could demand they reimburse for the overpayment in the same amount so nothing much happens. I've never heard of any consequences for failure to withhold the 20%.

That said, I remember collecting $ from a participant once, or twice, to submit as WH.