Pennsylvania Issues Guidance on Revised IRA Provision, Delays Impact

by admin

Last fall, Pennsylvania amended its unclaimed property law to, among other things,  change the ways that Individual Retirement Accounts (IRAs) are covered by the Act.  Under the former law, IRAs were not required to be turned over to the state unless there was an unclaimed distribution or the IRA owner reached the mandatory distribution date specified by the IRS rules.  Under the revised law, the dormancy period begins to run when two account statements are returned to the custodian as undeliverable.  In other words, if a person moves, but forgets to tell his or her IRA custodian within the period of two account statements, the IRA account is on its way to being turned over to the Commonwealth.

As noted in an earlier post, this approach is potentially problematic.  IRA’s are perhaps the predominant “buy and hold” type of investment.  Not only are they designed to provide preferable tax treatment in exchange for holding until a later age, but there are actually hefty tax penalties for failing to hold off on distributions until age 59.5.  The new Pennsylvania laws, however, fail to take this economic reality into account, the dormancy period begins upon the requisite amount of returned mailings, regardless of the age of the account holder or any tax penalties that may occur.

As a result, a number of groups, including the Unclaimed Property Professionals Organization and the Investment Company Institute have objected to the new legislation and/or have asked Pennsylvania to amend or clarify the application of the new IRA provisions.

As a result of these inquiries, the Pennsylvania Department of Treasury issued policy guidance on the application of the new IRA rules.  Unfortunately, the guidance does not address the shortcomings of the revised law, but kicks the problem down the road.  In the guidance, the Treasury Department opines that no adverse tax consequence for the owner is “anticipated”:

The provisions of Section 1301.8 directing the transfer of abandoned and unclaimed retirement accounts into the custody of the Commonwealth are not anticipated to implicate early distribution related taxes. Upon the transfer of an IRA or certain retirement assets pursuant to Section 1301.8, the Commonwealth will act solely as custodian of those assets until such time as the owner or beneficiary is located and reclaims the abandoned and unclaimed property. Because neither the owner nor the beneficiary will have constructive possession or control of the account, the transfer to the Commonwealth’s custody should not be taxable, reportable or potentially penalize a premature distribution to the account owner, but instead should be treated as a non-reportable transfer of retirement assets.

Unfortunately, there is no citation, analysis, or explanation of the reasons for the Treasury Department’s position, nor any indication that there has been any communication with the IRS in order to confirm the Treasury Department’s understanding.  That said, the guidance at least puts off the day of reckoning for this issue, providing that the Treasury Department will “neither demand nor accept” abandoned IRA accounts unless (1) three years have passed since the death of the owner and or (2) the owner has reached the mandatory distribution requirement.  This directive will remain in place while the Treasury Department studies the issue.