PenChecks Blog

Other Matters that Matter

By Mike McWherter, JD
Chief Compliance Office
PenChecks Trust™

With the retirement industry’s emphasis on the SEC’s Reg BI and what is the DOL going to do, as well as DOL and Treasury regs for MEPs, other matters may go unnoticed. Some “other matters” may be lower impact. Others may foretell new or significantly different requirements. Here are two such items, one a bit mundane; the other is perhaps a precursor to future regulatory action.

Retirement Plan Distribution Withholding for Participants with Addresses Outside the U.S.
On May 31, 2019, the IRS issued proposed regulation §31.3045(e)-1 addressing withholding tax for distributions from qualified retirement plans, IRAs and annuities. The current guidance, IRS Notice 87-7, has been around longer than I’ve been out of law school, barely.

The proposed reg won’t apply to eligible rollover distributions directly rolled over to another qualified plan or IRA, and also won’t apply to non-resident aliens, who are generally subject to 30% withholding.

But here’s who and what it does apply to:

  • A payee who provides a U.S. residence address but directs that the payment be sent outside the U.S. will not be allowed to waive withholding
  • A payee with a foreign address who directs the payment be sent to a financial institution inside the U.S. will also not be allowed to waive withholding due to the ease with which funds held inside the U.S. can be withdrawn by a person outside the U.S.
  • A payee with only a non-U.S. address, or who provides no residence address (think P.O. Box), will not be allowed to waive withholding
  • A payee who furnishes a military or diplomatic post office address (APO, FPO, DPO) will be treated as having a U.S. residence address and could waive withholding if the payment was not otherwise subject to mandatory withholding
  • The above rules apply to both periodic and lump-sum payments
  • A “U.S. residence address” includes U.S. territories and possessions

Accordingly, now would be a good time to review your withholding procedures to make sure you’re keeping it between the lines.

ERISA Advisory Council Addresses Uncashed Retirement Plan Checks and State Unclaimed Property Laws

Uncashed checks from qualified retirement plans have been an issue for years. The DOL estimates that approximately $15 million in distribution checks go uncashed each year. Meaning that every few years there is an additional $50 million in uncashed retirement plan checks. After several years there is an additional $100 million in uncashed retirement plan checks.

And today’s mobile work force only exacerbates the issue. One estimate from the Bureau of Labor Statistics is that by age 40 the average worker will have held 10 jobs, thereby increasing the likelihood of an uncashed retirement plan check.

At the June 2019 meeting of the ERISA Advisory Council in Washington, DC, industry representatives, including PenChecks™ Trust, were invited to address the Council on the issue of uncashed checks from ERISA plans.

The Council’s objective was to facilitate a review of the procedures used by various states, and the differences among the states with respect to unclaimed property, some of which can be significant. Some of the differences include:

  • Rates of return credited to unclaimed property
  • Holding periods utilized by various states
  • What, if any, steps states utilize to locate missing participants
  • Success rates in locating missing participants
  • Tax treatment
  • Issues for plan sponsors with participants in more than one state

Importantly, the Council also acknowledged the broad view of ERISA preemption applied by the DOL with respect to retirement plan assets vis-à-vis state unclaimed property laws and escheatment. They also addressed the issue of whether voluntary transfers of uncashed distribution checks to a state’s unclaimed property fund advances the DOL’s goal of reuniting missing participants with their retirement savings.

In his upcoming blog, PenChecks, Inc. President Spiro Preovolos will provide informative and timely insights into these issues from the unique vantage point of his participation in the recent ERISA Advisory Council meeting that addressed them. Neither the DOL nor the IRS has published guidance on this important topic, so Spiro’s insights and observations will shed light on what could be an upcoming DOL regulatory initiative.

Mike joined PenChecks in 2012 and is responsible for managing and overseeing the company-wide compliance function. With more than 23 years of combined legal, financial institution and ERISA plan provider compliance experience, Mike provides guidance and oversight for all compliance matters, supervises regulatory exams and audits, and coordinates between outside counsel, management and the board of directors.

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