What You Need to Know About Your ESOP Tax Reporting

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1 W W W. S E S A D V I S O R S. C O M What You Need to Know About Your ESOP Tax Reporting Written by Kelly Irizarry

2 Tax reporting is a small, but important element of the overall recordkeeping process as it relates to ESOP plan administration. This article will explain what is needed and required to avoid unpleasant surprises and penalties for noncompliance. Fortunately, most plans engage the Trustee or Third Party Administrators (TPAs) to bear the administrative burden of the preparation and submission for the 1099-Rs and Form 945. Nonetheless, employer/taxpayer cooperation is vital to ensure a smooth and accurate process.

3 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.

4 Form 1099-R Reporting Requirements 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 the distribution amount is transferred to a direct rollover account as the distribution amount is nontaxable. 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.

5 Form 1099-R Reporting Requirements (con t.) 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 knownthat the distribution is a Roth IRA conversion (an IRA converted to a Roth IRA), or a 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, i.e. 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).

6 Form 1099-R Filing Deadlines All employees/taxpayers that require a Form 1099-R should receive a copy of the Form 1099-R by January 31 st for tax filing purposes. The employer has a February 28 th IRS deadline to file Copy A of Form 1099-R. The Copy A filing submission to the IRS consists of the red IRS Form 1099-R 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.

7 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 notneed 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.

8 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 2013, the employer is a monthly schedule depositor if the total tax reported on the 2011 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 on any day in a deposit period, 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.

9 Form 945 Filing Deadline The Form 945 must be filed by January 31 st 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 11 th. 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 who may sign the Form 945.

10 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 tax withholding thresholds of $2,500, $50,000 in a calendar year or $100,000 in a deposit period. 3. Ensure that you re depositing withholding under the same TIN as you re reporting on Form 1099-R. Iifthe 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.

11 In conclusion, carefully following these procedures is necessary to avoid penalties for non-compliance. For example, the failure to file 1099-Rs on time may result in a penalty range of $30 to $100 per form depending on when the forms were filed. Also, failure to prepare and issue the 1099-Rs on time could result in a participant s need to amend their personal tax return. Need help with your ESOP tax reporting? Visit to learn more. SES ADVISORS has one of the nation s largest core groups of ESOP professionals, with offices in Pennsylvania, New Jersey, New York, Massachusetts, Rhode Island, Vermont, Florida, Kentucky, Indiana, Virginia and Texas. HEADQUARTERS: 10 Shurs Lane, Suite 102 Philadelphia, PA Consult your advisors for up-to-date legal and tax information. IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or(ii) promoting, marketing or recommending to another party any tax advice addressed herein. Please contact a member of the firm if you require a formal, written tax opinion that satisfies applicable IRS requirements.