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What You Need to Know for Tax Reporting Season

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Client Update: What You Need to Know for Tax Reporting Season

November 30, 2015

By Kelly Irizarry (215.508.5631, kirizarry@sesadvisors.com)

The holiday season is upon us. For sponsors of qualified retirement plans, that means it’s time to turn at least a small portion of our attention to a vastly less joyous, but nonetheless important time: tax reporting season. For ESOPs and other retirement plans, tax reporting season consists of a six- to eight-week process of reporting benefit distribution and tax withholding activity to participants and the Internal Revenue Service.

Navigating the season may be as simple as confirming that your plan’s institutional trustee handles the process as part of their engagement, or as complicated as handling the logistics of preparing the forms, registering for electronic fillings and managing several overlapping deadlines. For those of you who don’t have an institutional trustee and wish to outsource as much of these responsibilities as possible, SES Advisors offers an excellent solution. However if you decide to handle your 1099 and 945 processing, we strongly encourage you to take a few minutes to read the overview below. It provides a basic overview of the process including nuances in the rules and procedures that could result in significant monetary penalties if they are not followed precisely.

Annual ESOP Tax Reporting and Filing

Form 1099-R is filed for participants receiving distributions of $10 or more from retirement plans or profit-sharing plans, individual retirement arrangements (IRAs), annuities, pensions, death benefit and disability payments made from a retirement plan, and distributions or 404(k) dividends from an Employee Stock Ownership Plan (ESOP).

Form 945 is filed to report all federal income tax withheld from non-payroll payments or distributions on an annual basis. When filing the Forms 1099-R and 945 the payer, trustee or plan administrator must use the same employer identification number (EIN) and name used to deposit the tax withholdings.

Form 1099-R Reporting Requirements

Form 1099-R contains detailed information specific to each recipient and outlined as follows:

  • The recipient account number is the social security number for the individual who received the distribution. For example, if a death benefit distribution was made to a participant’s beneficiary, the beneficiary’s social security number and address would be reported on the Form 1099-R.
  • The gross distribution amount is reported under Box 1; the total amount of the distribution prior to any tax deductions withheld. The amount in Box 2A is the taxable amount of the distribution; the amount reported would be $0.00 if distribution amount is transferred to direct rollover account as the distribution amount is non-taxable.
  • Federal income tax withheld is reported in Box 4; if state or local income tax is withheld, those amounts are reported in Boxes 12 and 15. The payer’s state identification number is entered into Box 13 along with the abbreviated name of the state.
  • Each distribution has a code that is reported in Box 7; the distribution codes are dependent upon the type of distribution processed. The most common codes reported are as follows:
    • Code 1 {early distribution} — If employee/taxpayer has not reached age 59.5 and there are no known exceptions under Code 2, 3 or 4.
    • Code 2 {early distribution with possible exceptions} — Employee/taxpayer has not reached age 59.5 and it’s known the distribution is: a Roth IRA conversion (an IRA converted to a Roth IRA), distribution from a qualified retirement plan after separation of service in or after the year the taxpayer has reached age 55.
    • Code 3 — Disability distribution.
    • Code 4 — Death benefit OR Code 4G as a death benefit rollover distribution.
    • Code 7 — Normal distribution from a plan as in employee/taxpayer is at least age 59.5.
    • Code G — Direct rollover and rollover contribution.
    • Code U — Dividends that have been distributed from an employee stock ownership plan (ESOP) under section 404(k).


Form 1099-R Filing Deadlines

All employees/taxpayers that require a Form 1099-R should receive a copy of the Form 1099-R by February 1st for tax filing purposes. The employer has a February 29th IRS deadline to file the paper version Copy A of Form 1099-R; the employer has a deadline of March 31st to file the electronic version Copy A of Form 1099-R. The paper Copy A filing submission to the IRS consists of the red IRS Form 1099-Rs as well as the Form 1096 Transmittal which is a summary sheet of all the information contained with the Form 1099Rs (i.e., total federal taxes withheld, number of Form 1099-Rs submitted, total gross distributions amount, etc.). The Form 1096 Transmittal should be signed by the trustee of the retirement plan that has issued the distributions.

For 2014 and beyond, most employers are required to file the Copy A electronically via the IRS’ FIRE system. If you are not currently registered for the FIRE system, and are planning to prepare 1099s yourself, we strongly urge you to register as soon as possible to ensure you have your credentials in time to file before the deadline. It may also take you some time to acclimate to the FIRE system’s interface. For those plan sponsors utilizing SES Advisors for their 1099 processing, the electronic filing option is handled by us on your behalf.

Form 945 Reporting Requirements

Form 945 is used to report federal income tax that is withheld from non-payroll payments to include: pensions, military retirement, gambling winnings, voluntary withholding on specific government payments and backup withholding. All of the federal income tax withheld from non-payroll payments or distributions are to be reported once on a calendar year basis. If an employer/taxpayer withholds federal income tax, a Form 945 must be filed; if there is zero federal tax withheld, then a Form 945 does not need to be filed.

The Taxpayer Identification Number (TIN) used on the Form 945 must be consistent with the TIN used on the Form 1099-R as the two forms are submitted to the Internal Revenue Service and the federal tax withholding amounts must match one another. Generally the best practice is to use the Plan’s TIN. However, in some cases the Sponsor’s TIN or a third party payer’s TIN is used.

Form 945 Tax Withholding Requirements

Federal deposits made by electronic transfers are usually processed using the Electronic Federal Tax Payment System (EFTPS). This is a free service offered by the Department of Treasury. Other options available for funds transfers are payroll service, financial institution, institutional Trustee, or other third party; all other options may have fees associated with the service. If the Summary of Deposits is less than $2,500, payment can be made by check with the Form 945; otherwise all deposits should be made using an electronic funds transfer system. Payment of less than $2,500 should be submitted with the Form 945 and Form 945-V (payment voucher) with a check or money order made payable to the “United States Treasury.” The EIN, Form 945 and tax period should be referenced on the check or money order.

There are two deposit schedules that dictate when to deposit federal income tax withheld: semi-weekly or monthly. The associated schedules determine when the deposit is due after the tax liability occurs; before each calendar year a determination must be made as to which schedule will be used. For calendar year 2015, employer is a monthly schedule depositor if the total tax reported on the prior year’s Form 945 was $50,000 or less; if the total tax exceeded $50,000 on the prior Form 945, the employer is a semi-weekly schedule depositor. Notwithstanding the prior total, if total withholding exceeds $100,000 at any point in the year, the taxpayer immediately becomes a semi-weekly schedule depositor. For these taxpayers, the withholding must be deposited the next day after the tax liability is incurred and Form 945-A must accompany Form 945.

Form 945 Filing Deadline

The Form 945 must be filed by February 1st if a payment is included with the submission. Otherwise, if deposits were timely and full payment of taxes for the year processed, the return can be filed by February 10th. All Form 945s are sent depending on two criteria: where the principal place of business is located and whether or not a payment is included with the return.

In most cases, the Form 945 is submitted by the owner of the business or the trustee of the qualified plan. There are alternative signature methods available such as corporate officers or duly authorized agents may sign the Form 945.

Avoiding Potential Pitfalls

Sponsors of ESOPs and other retirement plans should be wary of a few potential pitfalls concerning tax reporting and withholding deposits:

  1. Register for EFTPS even if you have no tax liability or your expected liability is less than $2,500. Registration is free and there are penalties for paying late or failing to pay electronically. It can take up to four weeks to receive your Personal Identification Number (PIN) from EFTPS. Plan ahead and register before you begin processing distributions.
  2. Be aware of any change in your withholding deposit status (e.g., when you first exceed the thresholds of $2,500, $50,000 or $100,000 in total tax withholding for any calendar year).
  3. Ensure that you’re depositing withholding under the same TIN as you’re reporting on Form 1099-R. If the TIN doesn’t match, the Plan Sponsor may be subject to penalties for late filing or failure to file and the Plan participants may have problems filing their personal tax returns electronically.
  4. Collect Social Security Numbers for every beneficiary when paying death benefits.
  5. Return your 1099 data to your TPA in a timely manner. SES sends a template and data request in December. A prompt response to this request helps us to ensure your forms are filed on time.


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