Key Issues > Duplication & Cost Savings > GAO's Action Tracker > Tax Treatment of 401(k) Transfers (2019-23)
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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.

Action:

The IRS Commissioner 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.

Progress:

IRS agreed with and has partially addressed this action, which was recommended by GAO in January 2019. IRS reported in December 2019 that officials met with the Department of Treasury in August 2019 to discuss approaches for clarifying if transfers of unclaimed retirement 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. According to IRS officials, at the conclusion of this meeting, IRS and Treasury officials directed a working group to continue analysis of relevant legal and practical issues and to continue development of a proposal for providing such clarification.

While IRS has made some progress in this area, it will be important for the working group to follow through on its planned analysis of relevant legal and practical issues. A complete consideration of the relevant legal and practical issues by the working group will help IRS determine the appropriate actions, if any, to take to inform plan service providers as to whether they should withhold federal income taxes from unclaimed savings transferred to states, which could result in IRS collecting additional federal tax revenue.

Implementing Entity:

Internal Revenue Service
  • portrait of
    • Charles Jeszeck
    • Director, Education Workforce and Income Security
    • jeszeckc@gao.gov
    • (202) 512-7215