If you offer retirement plans to your employees, your 401(k) plan manager or custodian may be required to file IRS Form 1099-R and send the form to qualifying employees. It’s important for you, as the business owner, to understand the 1099-R form and reporting requirements, too. IRS forms can get confusing and you want to be prepared if and when your employees come to you with questions.
If one look at a tax form causes your brain to shut down, we hear you—and we’re here to help. In this blog post, we’ll walk you through the process and offer some guidelines your employees should follow once they receive their forms.
What is IRS Form 1099-R?
Form 1099-R is one of twenty “information returns” the Internal Revenue Service (IRS) uses to report different kinds of non-employment income that taxpayers might receive outside of their salary. This helps to prevent them from underreporting their taxable income.
Form 1099-R in particular is used to report distributions, or withdrawals, from:
- Annuities, pensions, insurance contracts, or survivor income benefit plans
- Permanent and total disability payments under life insurance contracts
- Profit-sharing or retirement plans
- Retirement account rollovers
- Loans against pension plans
- Early retirement account distributions
- Individual retirement accounts (IRAs)
- Charitable gift annuities
Although retirees are the most common recipients of this specific form, people who are still working may get one too.
Why your employees may receive a 1099-R
If any of your employees received a retirement plan distribution of $10 or more during the previous tax year, your 401(k) plan manager or custodian should file Form 1099-R with the IRS and send your employee a copy. Those who took out a loan from their employer-sponsored retirement plan and didn’t pay it off in time (or left your company before they could finish paying it off) should expect to receive one too.
All 1099-R recipients must include the distribution amounts on their federal income tax returns and pay any taxes they owe on the amount.
Both taxable and non-taxable income is reported on this form, and whether or not recipients pay taxes on these withdrawals depends on the type of investment they drew from and what kind of distribution they took. In the case of Form 1099-R, all or a portion of the income reported on this form is taxable—with some exceptions.
Withdrawals from a Roth account and direct rollovers to a qualified retirement account typically won’t be treated as taxable income, while an early distribution from a non-Roth 401(k) will be taxed and penalized.
Of course, even if certain types of withdrawals are usually considered non-taxable, your employees must make sure that they follow distribution guidelines to ensure they don’t get a surprise tax bill when they file their returns.
Take indirect rollovers, for example. If your employee decides to conduct the rollover themselves, they will receive a distribution check from your 401(k) plan custodian with 20% of it withheld for federal taxes, in case they decide to keep the money instead. To complete the rollover, your employee must deposit the entire check plus the amount equal to the withheld 20% from another source (even though they didn’t actually receive it) into their IRA within 60 days to ensure that the withdrawal is tax-free. Following these steps may allow them to get back most of the 20% they put down in their tax refund for that year.
However, any part of the distribution check that your employee keeps for themselves and doesn’t deposit into a qualified account will count as a taxable distribution—and an early one too, subject to all the penalties of early withdrawal if they don’t qualify for an exception. Some of the exceptions include:
- Medical costs that are over 7.5% of your adjusted gross income
- Health insurance while unemployed
- The purchase of your first home
- Qualified higher education expenses
What information does Form 1099-R include?
Even though the form itself only takes up half a page, Form 1099-R contains a lot of necessary information for its recipients so it may look overwhelming at first.
The left side of the form is where you’ll find the identifying information for the payer (the plan custodian, in most cases) and the recipient (your employee). The right side contains information related to the distributions your employee took during the previous tax year, such as the total distribution amount, the taxable portion of their distribution, the kind of distribution they took, and any federal income tax withheld.
In the next section, we’ll explain how to fill out the form. Again, typically the 401(k) plan manager fills this out—but it’s important to understand the form and how things are calculated all the same.
Important sections of the 1099-R form
Payer’s TIN: Payer’s Federal Identification Number
This contains the plan custodian’s federal tax identification number, which would be their Employer Identification Number (EIN).
Account number (the bottom of the form)
If a recipient has multiple accounts with your plan provider that requires a separate 1099-R for each, this number is used to distinguish between the accounts.
Although it’s only required for those who hold multiple accounts with a plan custodian, the IRS recommends that plan administrators assign an account number for every Form 1099-R they file, especially if their record system uses the employee’s account number instead of their name or TIN for identification purposes.
Any number that is unique to the employee and can distinguish the account from any others is best, such as a:
- Policy number
- Checking account number
- Savings account number
- Brokerage account number
- Loan number
- Serial number
Using unique account numbers helps ensure that corrected information returns are processed accurately.
Keep in mind that this number should not appear anywhere else on the form. Additionally, if your plan manager uses reduced rate mail and sends these forms to employees using window envelopes, the account number should not show in the window—the US Postal Service may not accept them otherwise.
Box 1: Gross distribution
This shows the total amount (in dollars) that the employee has received from the plan.
Box 2a: Taxable amount
This indicates the taxable portion of the gross distribution amount noted in Box 1. It will always be equal to or less than the amount shown there.
Box 2b: Taxable amount not determined and total distribution checkboxes
If you (or the plan custodian) weren’t able to determine the taxable amount in Box 2a, you would check the box next to “Taxable amount not determined.”
If the recipient received the entire balance of their account as a distribution in one tax year, the box next to “Total distribution” should be checked.
Box 3: Capital gain
This shows the portion of the distribution that is allocated to taxable capital gains.
Box 4: Federal income tax withheld
This section notes the total amount of taxes that has been withheld from the distribution during the tax year, if any.
Box 5: Employee contributions / Designated Roth contributions or insurance premiums
Compared to Box 2a, which shows the taxable amount of your employee’s distribution, this section indicates what portion of their plan contribution, designated Roth contribution, or insurance premium isn’t taxable.
Put into simpler terms, it shows the portion of the distribution that your employee doesn’t have to pay taxes on. If you subtract the number in Box 2a from the number found in Box 1, you’ll find that the difference comes out to the number in this box.
This number is provided for your employee’s information only, and isn’t reported on or needed to fill out their tax return.
Box 7: Distribution code(s)
The single number or letter entered in this section describes the kind of distribution the recipient took, and is used to determine the distribution’s taxability (more on this in the next section).
You’d also check the box labeled “IRA/SEP/SIMPLE” if the distribution comes from a traditional IRA, SEP IRA, or SIMPLE IRA.
Box 9a: Your percentage of total distribution
If the recipient received a portion of a distribution sent to multiple people—for instance, if the owner of the plan died and had multiple beneficiaries or if retirement distributions are split after a divorce—the percentage of that amount is noted here.
Box 9b: Total employee contributions
This box indicates the recipient’s total investment in a life annuity from a qualified plan. The IRS doesn’t require this section to be filled out but the information may be useful to the recipient to have on hand when filling out their federal tax return.
Box 11: 1st year of designated Roth contributions
This indicates the year that the designated Roth account was made for the recipient, and accordingly, the first year that a contribution was made to the account.
Boxes 12-19: State and local information
These sections are used to report any amounts withheld for and reported to the taxpayer’s state and local tax departments. Just like Box 9b, the information here isn’t required for the IRS and is there more so for the recipient’s convenience.
Commonly used distribution codes
Box 7 of Form 1099-R uses single number or letter codes to show the type of distribution made by the taxpayer. If a taxpayer made more than one type of distribution from the same account in the previous tax year, they must receive a separate 1099-R for each one.
Here are some of the most commonly used distribution codes:
- Code 1: Early distribution, no known exception
- Code 2: Early distribution, exception applies
- Code 3: Disability retirement benefits
- Code 4: Death
- Code 7: Normal distribution
- Code 8: Corrective refunds taxable in the current tax year
- Code G: Direct rollover and direct payment to a qualified plan, 401(b), governmental 457(b), or IRA
- Code L: Loan treated as a distribution
- Code M: Qualified plan loan offset
If you need more information, the IRS offers a detailed set of instructions that includes what each box and distribution code means. We also recommend that 1099-R recipients reach out to their tax advisor.
How to file Form 1099-R
Plan custodians or administrators (typically the companies you’ve partnered with to manage your employee retirement plans) are required to send multiple copies of every 1099-R to the appropriate recipients on your behalf:
- Copy A must be filed with the IRS by the end of February, or by March 31st if you file electronically
- Copy B is sent to the employee to help them prepare their federal income taxes, and they must also send this copy to the IRS along with their return if box 4 shows that federal income taxes have been withheld from their distribution
- Copy C is another copy for your employee’s records
- Copy D is for the plan custodian’s records
- Copy 2 is used by the employee to prepare their state, city, or local tax return, if they live in an area where this income is taxed
Copy B, C, and 2 of each 1099-R form must be sent to recipients by January 31st.
In most cases, the custodian or administrator for each plan will be the ones to prepare Forms 1099-R for any distributions your employees may have taken from those plans. If you’re unsure whether your plan custodian is in charge of processing your employees’ 1099-R forms, you’ll want to get in touch with their customer service department. Then, if you determine that they won’t prepare some or all of these forms, you must find a third party to take care of this for you (usually your accountant or another plan provider offering these services) or complete this task in-house.
Keep in mind that some third party providers require advance notice if you plan on asking them to prepare your employees’ forms.
If you decide to prepare your Forms 1099-R in-house and are mailing paper forms to the IRS, you’ll need to file Form 1096: Annual Summary and Transmittal of U.S. Information Returns along with them.
How to file Form 1099-R electronically
If you have 250 or more 1099-Rs to file for your employees, the IRS requires you to file them all electronically using the IRS Filing Information Returns Electronically (FIRE) webpage. You can also choose to file electronically even if you don’t meet this requirement.
The IRS offers fill-in forms for some electronic tax forms, which makes them easier to fill out since you can do so right from your browser without needing additional software. However, that’s not the case with Form 1099-R.
In order to file them electronically, you (or your company’s tax preparer) must have software that generates a file according to the specifications outlined in Part C of Publication 1220 because the IRS doesn’t provide a fill-in form for Copy A. Note that the following electronic submission formats will not be accepted:
- Scanned documents
- Word documents
- Excel sheets
First-time electronic filers will also need to create a FIRE Account and apply for a five-digit Transmitter Control Code (TCC) in order to access the FIRE System. The IRS offers a detailed walkthrough for this process on its website.
What should your employees do with their Form 1099-R?
Once your employees receive their Form 1099-R, they should review the information on it as soon as possible to ensure it’s accurate.
If they haven’t received one when they should’ve, they should notify you or the plan custodian immediately and request one. This is important because they’re still responsible for filing their return with the right information and paying the appropriate taxes, even if their 1099-R doesn’t arrive.
The IRS uses software to match all 1099 and W-2 forms against the tax forms submitted by a taxpayer, so if the income amounts don’t match up, they will receive a bill for the remaining tax due.
But because the IRS processes so many forms during tax season, the notice may not arrive right away—meaning your employees may owe interest and additional penalties on top of the missing tax because it’s deemed late. This is why it’s so important to make sure that the distribution amounts noted on the 1099-R are correct.
If an employee receives a Form 1099-R when they shouldn’t have (or if they receive one with incorrect information), they must contact you or the plan custodian to fix the mistake. The party responsible for preparing the form must file a corrected version of the form with the IRS, the recipient, as well as their state, city, or local tax departments if applicable.
When filling out the new version, make sure to check the box at the top of the form labeled “Corrected” to show that the form you’re sending is replacing the earlier one.
Although your paychecks are likely your employees’ primary source of income, the voluntary benefits you provide may be supplying them with additional money. If so, it’s important that you accurately document this information come tax time so both you and your workers stay on the IRS’s good side.
Penalties for filing Form 1099-R late or incorrectly
Filing late returns
If you don’t file your returns on time, you may be subject to a late filing penalty. This penalty, which increases over time, also applies if you didn’t:
- Include all of the required information on the return
- File machine-readable paper returns
- Provide correct information or TINs
- File with paper forms when you were supposed to file electronically
Find the full penalty breakdown below (note that the IRS considers you a small business if you made $5 million or less in average annual revenue over the past three years):
|When the returns were filed||Penalty||Maximum penalty per year|
|If you correctly file within 30 days of the due date||$50 per form||$565,000 ($197,500 for small businesses)|
|If you correctly file more than 30 days after the due date but by August 1||$110 per form||$1,696,000 ($565,000 for small businesses)|
|If you file after August 1 (or if you do not file the required 1099)||$280 per form||$3,392,000 ($1,130,500 for small businesses)|
However, if the IRS determines that your failure to file correct information returns is because of an intentional disregard for the deadline or filing requirements, they can charge you a penalty of $550 minimum per form with no maximum penalty amount.
Failing to provide timely and correct statements to your employees
Additionally, if you don’t provide your employees with correct statements by the deadline, include all required information on the form, or provide an information return with correct information, you may also get hit with a penalty from the IRS.
The penalty structure looks a lot like the one outlined in the previous section—fees are assessed using the date that you provide the corrected returns as a baseline, and penalties that result from intentional disregard of IRS guidelines start at $560 per employee statement with no maximum penalty.
Here’s an important point to remember: Although they’re applied in the same manner, failure to provide your employees with timely and correct statements is a separate penalty from those incurred from failing to file timely and correct information returns with the IRS. This means that you may be responsible for two different penalties if you don’t provide the correct forms to the IRS and your employees, or if you fail to send the forms at all to these parties.
Failing to file electronically when required
If you meet the IRS electronic filing requirement of 250 1099-R forms or more but submit them to the IRS on paper, you may be charged a penalty of up to $280 per return if you don’t have an approved waiver (Form 8508).
This penalty counts separately for original returns and corrected ones, so if you fail to file both electronically when you should have, you’ll face two different penalties. However, you can file up to 249 returns on paper, so you’ll only pay penalties for any filed paper returns over that amount.
So if you were to send 300 original returns and 150 corrected returns on paper to the IRS, you would be penalized for 51 of the original returns and none of the corrected ones.
IRS Form 1099-R penalty exceptions
The IRS does make some exceptions to these penalties.
For instance, if an error or omission on a return doesn’t prevent the IRS from processing the form, they may consider the mistake inconsequential and waive the penalty. Similarly, if an error or omission on the form you send to an employee doesn’t prevent them from filing their taxes, your penalty may also be waived.
But if a form contains incorrect names, TINs, addresses, or amounts, these mistakes won’t qualify for an exception as these mistakes make it harder for the IRS to process the form.
If you’re faced with a penalty for filing late or incorrect information returns, you may be able to avoid the penalty fee if you can establish reasonable cause for the action and prove that you couldn’t file the forms because of circumstances out of your control.
The IRS “will consider any reason which establishes that you used all ordinary business care and prudence to meet your federal tax obligations but were nevertheless unable to do so”—such as a natural disaster or an inability to obtain records—but you’ll also need to prove that you did everything you could to avoid failure. Naturally, this means that the information you’ll need to establish reasonable cause will depend on your specific situation.
Use these questions as a reference for the kind of information needed to make your case to the IRS:
- What happened and when did it happen?
- What facts and circumstances prevented you from filing your return when you were supposed to?
- How did the situation affect your ability to file or perform your other day-to-day responsibilities?
- Once the situation changed, what actions did you take to file the return?
Of course, the IRS won’t just take your word for it so you’ll also need to provide them with proof of your circumstances—expect to show documentation, records, or letters to support your claim.
Say you couldn’t file a return because you didn’t have an employee’s correct TIN. In this case, you must be able to prove that you made an initial request for the employee’s name and TIN (typically at the start of their employment), and annual solicitations if required as well. This shows that you have done your due diligence in following IRS guidelines and did what you could to get the information you needed.
For more information on how to get penalty relief, visit the IRS website. If you have any questions on filing Form 1099-R for your employees, contact your business’s tax preparer.