Annuity Purchase 1099-R reporting

[mefrancis1729]

If a plan purchases an annuity for a participant to remove them from the plan, does the plan still have to issue a 1099-R? Would it show the annuity purchase amount and that it was not taxable? I know the annuity company will issue a 1099-R for the payments the participant receives, but what about on the plan's side? 

[Larry Starr]

16 minutes ago, mefrancis1729 said:

If a plan purchases an annuity for a participant to remove them from the plan, does the plan still have to issue a 1099-R? Would it show the annuity purchase amount and that it was not taxable? I know the annuity company will issue a 1099-R for the payments the participant receives, but what about on the plan's side? 

All distributions require a 1099R.  And of course, the amount of the distribution is the amount of the distribution (out of the plan and TO the annuity carrier).  Use the right code and all is fine.

[Bird]

I hesitate to disagree with the Great and Powerful Larry Starr but something tells me that if you purchase an immediate annuity and the insurer is effectively taking on the liability of making payments, that there is no 1099-R reporting.  I can say with some certainty that it is not a rollover, so that leaves the Q of exactly how to report it if indeed you have to - the full amount but $0 taxable?  

[Bird]

This thread from 2009, in which I participated, concludes with another poster calling the IRS and being told it is not reportable.

[Larry Starr]

6 hours ago, Bird said:

This thread from 2009, in which I participated, concludes with another poster calling the IRS and being told it is not reportable.

I don't buy it.  I think it is reportable.  This is from the 1099R instructions: 

Box 1. Shows the total amount you received this year. The amount may have been a direct rollover, a transfer or conversion to a Roth IRA, a recharacterized IRA contribution; or you may have received it as periodic payments, as nonperiodic payments, or as a total distribution. Report the amount on Form 1040 or 1040NR on the line for “IRAs, pensions, and annuities” (or the line for “Taxable amount”), and on Form 8606, as applicable. However, if this is a lump-sum distribution, see Form 4972. If you haven’t reached minimum retirement age, report your disability payments on the line for “Wages, salaries, tips, etc.” on your tax return. Also report on that line permissible withdrawals from eligible automatic contribution arrangements and corrective distributions of excess deferrals, excess contributions, or excess aggregate contributions except if the distribution is of designated Roth contributions or your after-tax contributions or if you are self-employed. If a life insurance, annuity, qualified long-term care, or endowment contract was transferred tax free to another trustee or contract issuer, an amount will be shown in this box and code 6 will be shown in box 7.

First, I do agree that NOT reporting it will not incur any problems. But that does not make it the right answer.  I question why they would have the info I highlighted in bold above if there was no need to report an annuity purchase and transfer to the participant. It seems to me to be the same exact issue.  BTW, calling the IRS and asking what the right answer is should never be used as proof of the correct answer.  You do not connect with a tax specialist who knows the intricate issues involved; they might figure since it isn't taxable anyway, why report it? But that is not necessarily an educated or a correct answer.  Since it won't hurt to file the 1099R, we would file it (and have the two times in 35 years+ that someone has actually had an annuity purchased for them).

Larry.

[Bird]

12 hours ago, Larry Starr said:

Box 1. Shows the total amount you received this year. The amount may have been a direct rollover, a transfer or conversion to a Roth IRA, a recharacterized IRA contribution; or you may have received it as periodic payments, as nonperiodic payments, or as a total distribution.

But none of those apply.  The participant received nothing from the plan.  The plan transferred the payment liability to an insurer.

12 hours ago, Larry Starr said:

If a life insurance, annuity, qualified long-term care, or endowment contract was transferred tax free to another trustee or contract issuer, an amount will be shown in this box and code 6 will be shown in box 7.

C'mon Larry, putting something in bold does not make it true...you know very well this is not a 1035 exchange.

12 hours ago, Larry Starr said:

BTW, calling the IRS and asking what the right answer is should never be used as proof of the correct answer. 

I fully expected that!

12 hours ago, Larry Starr said:

Since it won't hurt to file the 1099R, we would file it (and have the two times in 35 years+ that someone has actually had an annuity purchased for them).

Meh.  Being fully convinced that this is not reportable I don't see the need.  And then I go back to "how" - I suppose if you call it a rollover there is not harm, but it's not right.  Likewise for a 1035 exchange.

[Larry Starr]

19 hours ago, Bird said:

But none of those apply.  The participant received nothing from the plan.  The plan transferred the payment liability to an insurer.

C'mon Larry, putting something in bold does not make it true...you know very well this is not a 1035 exchange.

I fully expected that!

Meh.  Being fully convinced that this is not reportable I don't see the need.  And then I go back to "how" - I suppose if you call it a rollover there is not harm, but it's not right.  Likewise for a 1035 exchange.

I just realized, I think we are talking about two different types of annuities.

I am thinking of an annuity as an investment (think, single premium deferred annuity).  So the lump sum for the participant goes into a SPDA and the annuity is distributed to the participant.  I believe that needs a 1099R since the participant received a distribution from the plan, the distribution of an annuity CONTRACT.

HOWEVER, if we are talking about, say, the lump sum is used to purchase an immediate life annuity (or J&S), then that is a transfer of the liability to the insurance company and I'm willing to bend to not needing a 1099R in that situation.

Sorry for the confusion. Is that any better?

[Patty]

The distribution seems to me to be a lump sum distribution requiring 1099R reporting and 20% withholding (if it's an ERD).  The insurance company should account for the investment amount having been taxed by basis reporting.

[Bird]

17 hours ago, Larry Starr said:

Sorry for the confusion. Is that any better?

Yes, thanks.  I believe the OP was talking about an immediate annuity purchased by the plan for purposes of having monthly benefits paid by the insurance company.  

I may have gotten myself twisted up with the terminology.  For anyone who cares, I think the following is true:

A single premium deferred annuity can be purchased by a plan participant upon leaving a plan.  This is almost invariably an IRA and properly treated and reported as an IRA rollover.

A "qualified plan distributed annuity" is something that was available way back in the day, before IRA rollovers were liberalized.  It was in fact almost the only way to get money out of a plan in a form other than a taxable lump sum or monthly annuity.  I'm pretty sure that technically this is not reportable - it's not an IRA rollover but it acts exactly as one.  I'm not sure why anyone would do this instead of an IRA except by accident.  But if you want to report it as a rollover go for it.

As noted, I believe the situation at hand is an immediate* annuity, where the insurance company will pay monthly benefits - no chance to surrender the contract and get a lump sum or do anything other than receive those monthly benefits under the terms of the contract (possibly with years certain or similar provisions).  Not reportable.

*Technically it could even be deferred but with the provisions locked in place - e.g. paying $X/month at some later date.

[Bird]

16 hours ago, Patty said:

The distribution seems to me to be a lump sum distribution requiring 1099R reporting and 20% withholding (if it's an ERD).  The insurance company should account for the investment amount having been taxed by basis reporting.

As just posted, the purchase of a single premium deferred annuity in this day and age is almost certainly going to be an Individual Retirement Annuity, which is a rollover and not taxable.  Even in the highly unlikely event that it is a Qualified Plan Distributed Annuity, it is not taxable - it is effectively equivalent to an IRA rollover where subsequent withdrawals are taxable (or could be rolled over to an IRA and not taxed).  Only if it were (accidentally and/or stupidly) purchased as a "regular" after-tax SPDA without the tax protection of an IRA or Qualified Plan Distributed Annuity would it be a taxable event.