IBA Compliance Connection

Your go to source for compliance!

One of our business customers set up several 401(k) accounts several years ago. We opened the accounts as traditional IRAs, named in the company’s name. The company’s owner signed the signature cards. The only document showing the employee’s signature is a form provided by the company showing that the employee marked that they want to hold the IRA at our bank. Is that correct? We are concerned that one of the employees took an early distribution for a family funeral expense — and because the company is set up as the IRA’s primary owner, we send an IRS 1099-R form to the company as well as the employee.

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If these accounts truly are 401(k) accounts, they should not have been set up as Traditional IRAs. Because vastly different tax rules and reporting requirements apply to these types of accounts, it is important to correctly identify the accounts as 401(k) accounts rather than IRAs in your account records.

The 1099-R form used to report the distribution for an employee’s funeral expenses should have been reported to the recipient of the distribution from the retirement account — which was the employee. Consequently, we recommend filing a corrected 1099-R if the distribution was mistakenly reported as a distribution to the employer.

For resources related to our guidance, please see:

  • FDIC Trust Examination Manual, F. Individual Retirement Accounts (IRAs) (“An IRA is a personal savings plan that offers a person tax advantages to set aside money for retirement. Two advantages for the individual include that they may be able to deduct contributions to the IRA in whole or in part, and generally, earnings and gains are not taxed until retirement distributions commence. Tax qualification for IRAs is achieved pursuant to IRC Section 408. . . .”)
  • FDIC Trust Examination Manual, Glossary (“401(k) Plan. A defined contribution plan established by an employer which enables employees to make pretax contributions by salary reductions structured within the format of a cash or deferred plan. . . . Individual Retirement Account (IRA). A retirement savings program for individuals to which yearly tax deductible contributions up to a specified limit can be made. The amounts contributed are not taxed until withdrawal. Withdrawal is not permitted, without penalty, until the individual reaches age 59 1/2.”)
  • IRS, 401(k) Plans (“A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”)
  • IRS, Traditional IRAs (“A traditional IRA is a way to save for retirement that gives you tax advantages. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.”)
  • IRS Form 1099-R (“Generally, distributions from retirement plans (IRAs, qualified plans, section 403(b) plans, and governmental section 457(b) plans), insurance contracts, etc., are reported to recipients on Form 1099-R.”)
  • IRS FAQs Regarding Hardship Distributions, What is the IRS definition of hardship for a 401(k) plan? (“Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: . . . (5) burial or funeral expenses; . . .”)