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General government: Tax Treatment of 401(k) Transfers (2019-23)

Clarifying whether transfers of unclaimed savings from employer-based plans to states are distributions and should be subject to tax withholding could result in the Internal Revenue Service collecting over a million dollars annually in additional tax revenues if these transfers are taxable events.

Year Identified: 2019
Area Number: 23
Area Type: Cost Savings & Revenue Enhancement

1 Total Action(s)

Action 1

The Commissioner of the Internal Revenue Service (IRS) should work with the Department of the Treasury to consider clarifying if transfers of unclaimed savings from employer-based plans (such as 401(k) plans) to states are distributions, what, if any, tax reporting and withholding requirements apply, and when they apply.

Executive Branch
Last Updated
August 31, 2021

IRS agreed with and has addressed this action, which GAO recommended in January 2019. In November 2020, IRS published guidance that clarifies that distributions from qualified plans to state unclaimed property funds are subject to federal income tax withholding and that qualified plans are generally required to report these transfers to IRS as designated distributions on IRS Form 1099-R for the year in which the distribution occurs. As a result of taking this action, each year IRS may be able to collect additional tax revenues stemming from unclaimed savings that are transferred to states.

Implementing Entity:
Internal Revenue Service
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