form 1099-r and 945 reporting: crossing the ts on plan ......datair employee benefit systems, inc. 2...

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Form 1099-R and 945 Reporting:Crossing the Ts on Plan Distributions

Kristina G. Kananen, QPA, QKADC Customer Support

DATAIR Employee Benefit Systems, Inc.

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What We Will Cover

• Form 1099-R

• Effective data gathering

• Interpreting data for accurate preparation

• Filing options and form 1096

• Correcting 1099-Rs

• Repercussions of not filing or furnishing 1099-Rs

• Other forms associated with Form 1099-R

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The Form 1099-R

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Form 1099-R

• For reporting distributions from (per the form)

– Pensions

– Annuities

– Retirement or profit-sharing plans

– IRAs

– Insurance contracts

– Etc.

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Form 1099-R

• Paper form consists of six copies

– Copy A - filed with the IRS

• Must be printed on scanable red-line form

• Only required for paper filing

– Copy B - attached to the recipient’s federal tax return

– Copy C – for recipient’s records

– Copy D – for payer’s records

– Copies 1 and 2 – for state, city, and local tax department

• May be required even with electronic filing

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Effective Data Gathering

• Starts as early as possible

• Verify if any ‘surprise’ distributions

• Make it part of the distribution process

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Data Needed - Payer

• Trust Name/TIN or Plan Name/EIN

• Withholding deposits

• Impact on Form 945

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Data Needed - Recipient

• Name

• Address

• SSN, or Trust Identification Number

• Age on distribution date

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Data Needed – Distribution

• Date of distribution

– Tax-withholding liability

– Age determination

• Reason for distribution

– Termination, death, disability, retirement

– Legally required – corrective or RMD

– Hardship distribution

– Deemed distribution

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Data Needed – Distribution (Continued)

• Form of distribution

– Lump sum

– Periodic payments or substantially equal payments

– Modification of substantially equal payments

– Direct rollover

– Single payment, required by law

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Data Needed – Distributions (Continued)

• Composition of the distribution

– Pre-tax money

– Employee after-tax contributions

– Cost of insurance (already taxed)

– Roth contributions (year commenced)

– Employer securities

– Loans

– Capital gains

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Data Needed - Summary

• Who – payer/recipient

• When – date and age of recipient

• Why – triggering event

• How – form of distribution

• What – Sources of money distributed

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Gathering Data

• Ask for information from plan administrator/trustee

• Require complete information from recipient before check is drafted

• Plan administrator/trustee should forward data when check is written

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Organizing the Data

• Folder method

• Letter of inquiry to plan administrator/trustee

• Spreadsheet method

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Folder Method

• Electronic or paper

– Copy of every distribution package prepared

– Copies of signed election forms and check

– Double check

– Prepare as you go, or at the end of the year

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Request Letters

• To all plan administrators/trustees

– No response does not mean no distributions

– May put data aside until valuation data is ready

– Risk of recipient calls in February

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Spreadsheet

• By plan or in one big spreadsheet for all distributions

• All required data entered as soon as it is available

• Any employee can then complete the 1099-Rs or import the data to software

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Interpreting Data

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Distribution Codes

• Determined by:

– Recipient age, and/or

– Reason for distribution, and/or

– Method of distribution, and/or

– Source of distribution

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Recipient Age Distribution Codes

• Codes 1 or 2 - Under 59½

• Code 1 - Over 55, but under 59½ and modified substantially equal payments

• Code 7 - 59½ or over

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Reason for Distribution Codes

• Code 4 – Death

• Code 2 or 3 – Disability

• Code 8, D or P – Corrective distribution

• Code E – Exceeded 415 limits

• Code L – Deemed distribution

• Code 9 – Cost of current life insurance protection

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Method of Distribution Codes

• Codes 1, 2, 4, or 7 – Lump sum distribution

• Codes 1, 2, or 4 – Lump sum distribution of Roth funds

• Code G – Rollover to regular IRA or conduit IRA

• Code H – Rollover to Roth IRA

• Codes 2, 3, or 7 – Substantially equal payments

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Source of Distribution Codes

• Code B – Roth contributions

• Code A – Eligible for special ten-year tax option

– Participant or beneficiary must have been born before 1/2/36; and

– Distribution must be a lump sum distribution

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Allowable Combination of Distribution Codes

• Code 1 – Early distribution; and

– 8, D or P – Corrective distributions

– B – Roth contributions

– L – Deemed distribution

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Allowable Combination ofDistribution Codes (Continued)

• Code 2 – Early distribution, exception applies; and

– Codes 8, D, or P – Corrective distributions

– Code B – Roth contributions

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• Code 4 – Death; and

– Codes 8, D, or P – Corrective distributions

– Code A – May be eligible for ten-year tax option

– Code B – ROTH contributions

– Codes G or H – Direct rollovers

– Code L – Deemed distribution

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• Code 7 – Normal distribution; and

– Code A – May be eligible for special ten-year tax option

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Distribution Codes That Must Stand Alone

• Code 3 – Disability under 72(m)(7)

• Code 9 – Cost of current life insurance protection

• Code E – Excess annual additions under Section 415 or certain amounts under 403(b) plans

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Determining Number of 1099-Rs by Distribution Codes

• HCE participant receives a lump sum distribution consisting of Roth and non-Roth money in December 2017

• He also has an insurance policy in the plan

• In March, 2018 ADP and tests fail and corrective distributions are determined

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How Many 1099-Rs?

• In January 2018

– One for eligible rollover of non-Roth funds

– One for eligible rollover of Roth funds

– One for cost of current life insurance cost

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How Many 1099-Rs?

• In March 2018

– Corrected 1099-R for non-Roth eligible rollover

– Corrected 1099-R for Roth eligible rollover

– New 1099-R for non-Roth corrective distributions

– New 1099-R for Roth corrective distributions

– Cost of current life insurance protection (CCLIP) has no changes

– Additional four 1099-Rs for a grand total of seven 1099-Rs

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Completing the 1099-R

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Completing Boxes 1 and 2

• Box 1 – Completed on all 1099-Rs and is grand total of all cash and FMV of any property

• Box 2a – Taxable amount – will be zero for direct rollovers

• Box 2b – Taxable amount not determined – intended for IRA distributions

• Box 2b – Total distribution – checked if distribution represents total amount to the credit of the recipient

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• Box 3 – Capital gain included in Box 2a

– Only available if participant was born before 1/2/36 and participated before 1/1/74

• Box 4 – Federal income tax withheld

– Amount actually withheld from the distribution

– Should have been:

• 20% of the taxable amount for eligible rollover distributions;

• 10% or the amount on the Form W-4p for all other distributions

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Completing Box 5

• Box 5 – Employee contributions/designated Roth contributions or insurance premiums

– Total amount on which recipient has already paid taxes

– Employee contributions mean after-tax contributions

– Roth contributions are deferrals made on an after-tax basis

– Insurance premiums are the total of CCLIP claimed as income in prior years

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Completing Box 6

• Box 6 – Net unrealized appreciation in employer’s securities

– If distribution from qualified plan and amount of NUA can be determined

– If a lump sum distribution, enter all NUA

– If not a lump sum distribution, enter only NUA for employer securities attributable to employee contributions

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Completing Box 7

• Box 7 – Distribution code(s)

– The actual codes were discussed earlier

– No more than two codes can be used

• Box 7 – IRA/SEP/SIMPLE

– Not used for qualified plan distributions covered in this presentation

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Completing Box 8

• Box 8 – Other dollar amount

– The actuarial value of an annuity contract that is part of the lump sum distribution, and not included in Boxes 1 or 2a

• Box 8 – Other percentages

– Only used if the annuity distribution is made to multiple recipients

– Never greater than 99 percent

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Completing Boxes 9a and 9b

• Box 9a – Your percentage of total distribution– For distributions made to more than one person or

beneficiary– Never more than 99 percent

• Box 9b – Total employee contributions– Not required to enter total employee contributions or

designated Roth contributions, but it may be helpful to the recipient

– If completed, do not include any amounts recovered tax-free in prior years

– For a total distribution, use Box 5 instead

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• Box 10 - Amount allocable to IRR within five years

– Enter the amount of the distribution allocable to IRR within the five-year period

– Not to be completed if an exception under 72(t) applies

• Box 11 – First year of designated Roth Contribution

– First year in which the designated Roth account was established

– Must have for any Roth account distribution (distribution code B)

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Completing Boxes 12 Through 14

• Box 12 – State tax withheld

– Some states require withholding

• Box 13 – State/payer’s state number

– State means the official state abbreviation

– Payer’ state number means the state-issued identification number

• Box 14 - State distribution

– Some states require taxation of retirement plan benefits

• 50 states, 50 different formulas to determine the state distribution amount

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Completing Boxes 15 Through 17

• Very few (if any) cities or localities tax retirement plan distributions

• Box 15 – Local tax withheld

• Box 16 – Name of locality

• Box 17 – Local distribution

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Choosing the Best Filing Method

• The methods available:

– Paper filing

– Electronic filing thru IRS FIRE system

– Service bureaus

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Paper Filing

• Must use special redline 1099-Rs for Copy A to report to the IRS

– Beware the IRS provided redlines

– Must have an accurate count of forms needed

• Must have a Form 1096

– Must be a redline form

– Person to contact can be other than the plan sponsor

– Only one type of information form can be included with the 1096

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Paper Filing (Continued)

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• Advantages

– Easy to explain to a new preparer

– Mailing to recipients and filing with IRS are ready in the same administrative process

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• Disadvantages

– Must use the redline forms

– Time consuming to print, stuff the envelopes, and mail to recipients

– Time consuming to print, collate, and mail to IRS

• Get delivery receipt

• If Box(es) 13 have entries, must also mail a copy to those states

– Due date with IRS – end of February

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Electronic Filing

• Must have a Transmitter Control Code (TCC) for the TPA or Institution filing the 1099-Rs

– Form 4419, application for Filing Information Returns Electronically (FIRE)

– IRS needs 45 days to issue a new TCC

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Electronic Filing (Continued)

• Must use software capable of creating a tax file in the format required by the IRS (Publication 1220)

• Tax file consists of:

– ‘T’ record with TCC information

– ‘A’ record for each payer included in the file

– ‘B’ record for each recipient for each payer

– And total records for each payer, each participating state, and the filing

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• Participating states – 31 for 2017 filings

Alabama Arizona ArkansasCalifornia Colorado ConnecticutDelaware Georgia HawaiiIdaho Indiana KansasLouisiana Maine MarylandMassachusetts Michigan MinnesotaMississippi Missouri MontanaNebraska New Jersey New MexicoNorth Carolina North Dakota OhioOklahoma South CarolinaVermont Wisconsin

– Listed in Publication 1220– Note: Virginia was a participating state for 2016, but is not

listed for 2017

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https://fire.irs.gov

https://fire.irs.gov/

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https://fire.irs.gov (Continued)


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https://fire.irs.gov Response


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• Advantages

– Due date is end of March

– Tax file can contain all 1099-Rs prepared

– Actual filing is Internet-based and easy to understand

– Uploading filing is very quick

– Status of filing is easily checked

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• Disadvantages

– Plan sponsor will need reassurance that 1099-Rs were timely filed

– Might be a bit harder to track down actual filed data in later years

– Need to do a test filing for combined federal/state filings

• https://fire.test.irs.gov

• Can be done when fire.test opens in November

• Note: FIRE closes down in mid-November to mid-January every year

https://fire.test.irs.gov/

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Form 945

• Form 945 and possibly Form 945-A

– Only required if federal income tax withholding during the year

– If funds still need to be deposited, due date is January 31

– If all funds deposited during year, due date is February 10

• February 12, 2018 for 2017 filing as the 10th falls on a Saturday

• If filing under plan sponsor’s EIN, 250 return rule may require electronic filing

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Form 945 (Continued)

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• CRITICAL: MAKE SURE THE EIN SHOWN ON THE FORM 945 MATCHES THE TAX DEPOSITS MADE DURING THE YEAR

– If more than one EIN was used for the deposits, then you need more than one Form 945

– By rights, the 1099-Rs should have the same EIN

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• If total amount withheld is $2,500 or less

– Periodic deposits not required

– Not required, but highly recommended

• If total amount withheld exceeds $2,500, will be subject to monthly or semiweekly depositing

• Periodic deposits are the same as for payroll withholding

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Determination of Deposit Frequency

• Semiweekly or monthly depositor determined prior to beginning of the year

– If total withholding on 2016 Form 945 was $50,000 or less, monthly depositor for 2017 filing

• Only Form 945 required

– If total withholding for 2016 was $50,000 or more, semiweekly depositor for 2018 filing

• Must also file Form 945-A

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Form 945-A

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Form 945-A (Continued)

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Form 8822-B

• Change to address or responsible party

• Filing updates the master record for the plan

• If not updated, inquiries are mailed to the responsible party at the last address reported

– Addresses shown on the Form 1096, or in the electronic filing B record, will be ignored

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Oops! Found an Error

• Form 1099-R

– If original form not yet reported to IRS

• Just make changes

• Provide the recipient with the new Form 1099-R

– If original form filed with the IRS, mark the corrected box and complete the form with all information

• If the original form was filed electronically, make sure the account number matches that shown on the original form

• Recipient must receive a copy

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Oops! Found an Error (Continued)

• Form 945-X – Adjusted annual return of withheld federal income tax or claim for refund

– If error on Form 1099-R impacts the amount of federal tax withheld

– If underreported on Form 945:

• Form 945-X must be filed by January 31 of the year following the year of discovery AND

• Amount of under deposit must have been deposited

• Penalty and interest may be due

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Oops! Found an Error (Continued)

– If overreported, can

• Apply the overpayment to the current year Form 945, or

• Claim a refund

– Caution – if the Form 945 was filed under the plan sponsor’s EIN, a claim for refund will be adjusted for any taxes due from the plan sponsor

– Timeframe for filing the Form 945-X is three years following the filing being corrected

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Form 945-X

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Form 945-X (Continued)

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Uh Oh: Failed to File or Furnish 1099-Rs

PENALTIES

AND

INTEREST

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• Penalties for non-filing or late filing of Form 1099-Rs are assessed against the payer

– Letters will be mailed to last responsible party and address on master file

– No assessment made ten or fewer non-filed or late Form 1099Rs

• Total for the year

• Watch out for terminated plans

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• Trade Preferences Extension Act, PL 114-27

– Enacted June 29, 2015

– Effective for information returns filed after December 31, 2015

• Even if for a prior year

– Information returns included

• W-2

• 1098 Series

• 1099 Series

• ACA Forms 1094-B and 1095-C Series

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• Provisions covered by Trade Preferences Extension Act

– Section 6721

• Failure to furnish a information return to the IRS

• Failure to furnish a correct information return to the IRS

– Section 6722

• Failure to furnish an information return to recipient

• Failure to furnish a correct information return to recipient

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• Penalties for failure to file

– $250 for each failure

• Increased from $100 for each failure

• Penalties for failure to furnish

– $250 for each failure

• Increased from $100 for each failure

• Maximum penalty

– Increased from $1,500,000 to $3,000,000

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• Penalties can be reduced if failures are corrected quickly

– If corrected within 30 days of due date

• $50 per failure

• Was $30 per failure

– If corrected after 30 days of due date, but before August 1 of the reporting year

• $100 per failure

• Was $60 per failure

• If it is determined the failure was willful on the part of the payer, all penalties are doubled

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• Notice 972CG is sent to payer

– Notification of late filing with IRS

– Includes

• Calculation of penalty amount

• Provides instructions for:

– Total agreement

– Partial agreement

– Total disagreement

• Includes payment coupon

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• Next – Notice 1948C acknowledging response to Notice 972CG

– Names the agent making the determination and contact information

– Can request additional information

– Can be a notice of abatement

– Can be a notice that the penalty stands

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• Notice CP215 – Notice of penalty charge

– Total amount of penalty

– Includes date interest will begin to be charged

• Notice 854C – Appeals procedure

– Mailed soon after the Notice CP215

– Provides the name and address of the penalty appeals coordinator

– Requests that any appeal response include the “under penalty of perjury…”

– Form 2848 is required for the appeals process

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• Notice CP504B – Notice of intent to seize property

– If appeal lost, or penalty not paid, must be paid upon receipt of the notice to avoid disruption of payer’s accounts and finances

• Other notices

– 2644C – Acknowledgement of payer letter, but explaining more time is needed to respond

– 86C – Notification that a different office is in charge of the penalty process

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Avoiding Further Complications

• Train your clients to:

– Immediately forward IRS correspondence to you

• IRS assumes no response is agreement

– Whenever client mails forms to the IRS, retain proof of mailing or get delivery receipts

– Retain undeliverable recipient copies

• TPA should:

– Retain records of when 1099-R information was provided

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Questions?

2017 ASPPAWinter Virtual Conference

Friday, December 89:00 am to 5:00 pm

Five Sessions Including:Washington Update and Late-Breaking Regulatory Developments

Ask the Experts Panel

Visit: www.asppavirtualconference.org

http://www.asppavirtual.org/

form 1099-r and 945 reporting: crossing the ts on plan ......datair employee benefit systems, inc. 2...

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