Failure to withhold 20% on distribution from 401k plan

A participant took a cash  distribution from their 401(k) plan mid year 2017.  The participant accounts are held in individual brokerage accounts, and even though the broker has been working with 401(k) accounts for years, they did not withhold the 20% tax.  They did not consult with us, and paid the entire vested balance to the participant.  The withholding is almost 10,000.  We are supposed to do a 1099R for this.  Who is responsible for paying the tax that was not withheld?  The participant has already spent the cash and part of the distribution represented an unpaid loan to boot.   Should we do the 1099R showing NO withholding or  with the correct 20% amount, and tell the brokerage firm  they owe the tax to the employer?  I need suggestions, etc on who pays the taxes - or if the participant is just liable for them based on their total tax liability for 2017.  

@Pammie57,The plan administrator is the responsible withholding party.  The IRS can recover the withholding , with interest, from the withholding party. The IRS will most likely not take any action if the tax liability is actually paid by the recipient of the distribution.  If the participant does not pay the taxes owed, the IRS can recover from withholding party.

The 1099-R should reflect what actually happened.  If no withholding was done, you report no withholding. 

Rather has it 100% correct. 

I recently found out that a brokerage firm that our client uses for a 401k plan also doesn't withhold for taxes nor will they forward them to the IRS.  They will issue a check in the amount of the taxes due if we ask.  The federal tax check is sent to the plan sponsor who is then responsible for sending it to the IRS.  I was very surprised that they don't offer this service.

2 hours ago, EBDI said:

I recently found out that a brokerage firm that our client uses for a 401k plan also doesn't withhold for taxes nor will they forward them to the IRS.  They will issue a check in the amount of the taxes due if we ask.  The federal tax check is sent to the plan sponsor who is then responsible for sending it to the IRS.  I was very surprised that they don't offer this service.

In my experience, most broker type firms don't offer this service.  Outside of platforms or bundled providers, it usually falls on the sponsor or TPA.  I had one client a few years ago who said his broker took care of it, only to find out that they sent the IRS a check marked taxes with his SSN in the memo line and said they took care of the withholding 

Sounds like a non-custodial account that didn't require a Trustee's signature to withdraw funds from the account. 

16 hours ago, RatherBeGolfing said:

In my experience, most broker type firms don't offer this service.  Outside of platforms or bundled providers, it usually falls on the sponsor or TPA.  I had one client a few years ago who said his broker took care of it, only to find out that they sent the IRS a check marked taxes with his SSN in the memo line and said they took care of the withholding 

I've had that happen also!

Accurate communication is a desirable quality in firms handling money.