Why 1099-R Reporting Processes Need to Change

The wave of retiring baby boomers is causing IRA reporting, carried out mainly through form 1099-R, to be a tricky process for some organizations. The numbers are staggering, with 10,000 boomers retiring every day for the next 12 years.

That’s a lot of forms 1099-R and 5498. The building volume of forms to mail to payees, and report to the IRS, means payers can no longer simply perform reporting tasks once a year. The PATH Act moved the federal reporting deadline up to January, and some states have followed suit. Trying to manage IRA reporting in one big chunk once a year is simply no longer feasible.

Complicated 1099-R reporting at the state level

With state deadlines and requirements varying wildly, payers need to keep up with IRA reporting records year-round if they hope to avoid corrections, penalties and other costly hassles. In fact, some of the most significant compliance hassles have sprung from states changing their regulatory requirements or not falling in line with federal reporting standards.

For instance, Virginia and Vermont recently dropped out of the Combined Federal State Filing (CF/SF) program, so payers now need to submit separate forms to those states and to the IRS. Other states, such as Alabama, Colorado, Georgia and Indiana, are still part of the CF/SF program but require separate reporting of 1099-R forms to the state.

Payers thinking they might be able to sneak underpayments or late payments to states are mistaken. While some elements of state reporting are somewhat inefficient, states are well tuned to find payers that aren’t reporting enough in payments and aren’t reporting payments on time.

Making 1099-R reporting a year-round process

In order to stay in compliance, payers have to treat reporting as a year-round activity. That means reconciling data from the general ledger with form-level data at least once a quarter, possibly even monthly or every two weeks. Payers that keep a year-round schedule can ensure the payments they report will match what they report at the end of the year, enabling them to avoid corrections and penalties.

They can also avoid some common pitfalls of state-level IRA reporting. One of the most frequently occurring hazards pops up when a payee has multiple beneficiaries within different states or at different withholding rates. Another potential problem occurs when a payee’s mailing address is in one state but the policy address is in another.

Quarterly reconciliation also enables payers to ensure that withholding amounts are correct for payees, thereby helping them to eliminate withholding issues that can annoy customers and lead to financial losses. State withholding regulations vary and can be difficult to manage.

Setting up systems for 1099-R reporting

Centralizing and automating IRA reporting puts payers in a position to perform quarterly reconciliation and stay out of regulatory trouble. At the same time, withholding management services enable payers to avoid withholding errors and put staff resources into other business-critical roles.

Tools that reconcile general ledger data with information on tax forms give payers confidence that the information they’re reporting to payees and the IRS is correct. They deliver a powerful level of control over IRA financial data. They also enable payers to move data from multiple sources into a single point of access, which is a critical aspect of centralizing and automating reporting.

IRA reporting doesn’t have to be overwhelming, but it will be for organizations that don’t properly prepare. With a wave of retirees cresting over the next decade, getting IRA reporting processes straight should be a priority for organizations of all kinds.