GAO Recommends IRS Reconsider Rollover Rules for Retirement Accounts Claimed From States

A Government Accountability Office (GAO) report explains that the IRS and the Department of Labor (DOL) have issued guidance on transferring defined contribution (DC) retirement savings for missing participants to states; however, the IRS has not clarified certain responsibilities or ensured that the retirement savings that owners claim from states can be rolled over into other tax-deferred retirement accounts.

For example, the IRS has not specified whether retirement plan providers should report state transfers to the IRS as distributions and withhold federal income taxes. IRS officials told the GAO that the agency has not issued guidance to clarify this issue because of competing priorities. As a result, GAO says, retirement plan provider practices vary—some providers withhold taxes when transferring savings to states while others do not.

In addition, the IRS has not taken action to ensure that individuals who claim retirement savings from a state can roll over these savings to other tax-deferred retirement accounts after the IRS’s 60-day deadline. IRS allows individuals to roll over savings after 60 days for several reasons, none of which include claiming savings from a state. The GAO report says, “Federal law seeks to protect the interests of participants in retirement plans. Account owners who are unable to roll over their reclaimed savings forgo the opportunity to continue investing the funds on a tax-deferred basis.”

The GAO has recommended that the IRS consider clarifying whether transfers from employer-based plans to states constitute reportable and taxable distributions and consider modifying its list of permitted reasons for rolling over savings after the 60-day rollover deadline. The IRS agreed with its recommendations and noted that the agency will work with the Department of the Treasury to address them.

In its research, the GAO found that of the 22 states responding to its survey, 17 states provided data indicating that $35 million in unclaimed retirement savings was transferred to them from employer plans and individual retirement accounts (IRAs) in 2016. Assets and uncashed checks from employer plans were the most common form of retirement savings transferred to states. After funds are transferred, owners can claim their savings from the state. According to the 15 states providing data on this, owners claimed about $25 million in retirement savings in 2016: $601, on average, from 401(k) plan checks, and $5,817, on average, from traditional lRAs. States reported using a range of strategies to maintain the value of retirement savings while holding these funds, such as applying interest.