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MTRS Made Approximately $1,470 of Monthly Benefit Payments to a Member Whose Account Contained an Invalid Social Security Number.

MTRS should ensure that all benefits are paid and reported to the IRS under the correct SSN.

Table of Contents

Overview

From August 2018 through May 2021, MTRS paid a total of approximately $1,470 in monthly benefit payments (approximately $40 per month) under an invalid Social Security number (SSN) to an individual who was entitled to receive a “minimum distribution”9 payment. As a result, the invalid SSN was reported to the Department of the Treasury’s Internal Revenue Service (IRS) for tax purposes, and an incorrect Form 1099-R10 was issued to the member.

Authoritative Guidance

According to the Internal Revenue Code, annuity and pension payments from MTRS are subject to federal income taxes. MTRS requires that payees complete a Form W-4P11 for the purpose of determining tax withholding amounts. A Form W-4P requires a valid SSN.

Reasons for Issue

The incorrect SSN appears to have been entered in MyTRS as a placeholder or dummy SSN until a valid SSN was received from the benefit recipient. Once the actual SSN was received, the necessary update to the member’s account with the accurate information was not completed. MTRS management could not explain why the account was not updated.

On July 30, 2021, MTRS gave us the following response as to why an incorrect SSN appears to have been entered in MyTRS as a placeholder or dummy SSN:

  • During the 1970s and early 1980s, MTRS’s recordkeeping systems were not computerized, and MTRS did not consistently collect or maintain SSNs. Instead, MTRS assigned a unique number to each member, stored it on an index card, and wrote it on all paper files pertaining to that member.
  • When MTRS first began using a computer system in the 1980s, SSNs were not required. However, when MTRS updated to a new system in the 1990s, SSN became a required field.
  • MTRS did not have SSNs in its records for members who still had funds on account with MTRS when it converted to the new system in the 1990s and whose last active employment was in the 1970s. To satisfy the validation requirements of the new system, MTRS chose to enter placeholder or dummy SSNs for these members, generated by combining an invalid SSN prefix (998) with each retiree’s MTRS member number.
  • When a member with a placeholder SSN, or such a member’s survivor, applies for benefits, MTRS obtains the beneficiary’s actual SSN, updates the account, pays benefits, and reports the payment to the IRS. MTRS retains the placeholder record for reference.

Recommendations

  1. MTRS should correct the member’s SSN in MyTRS and issue a corrected Form 1099-R to both the member and the IRS.
  2. MTRS should ensure that all benefits are paid and reported to the IRS under the correct SSN.

Auditee’s Response

The MTRS agrees with the facts of the case referred to in this finding by the OSA. We have corrected the member’s SSN in our system and issued corrected 1099-Rs to both the member and the IRS. Going forward, as a control on this manual process, the MTRS Application and Database Services department has queried our data and determined that no other disbursements have been made under an invalid SSN during or after the audit period. In addition, they have added that query to the list of data and scenarios that are reviewed by our 1099-R preparation team prior to the annual issuance of 1099-Rs.

Auditor’s Reply

Based on its response, MTRS is taking measures to address our concerns on this matter.

9.     If state service is terminated but funds are left on account with MTRS, federal and state laws require retirees to take a mandatory minimum distribution of their retirement account when they turn 72 if they are not collecting a retirement benefit and are not employed under MTRS.

10.     A Form 1099-R is an Internal Revenue Service tax form used to report retirement income received and federal income tax withheld.

11.     A Form W-4P is an Internal Revenue Service tax form used by individuals who receive pensions, annuities, and certain other deferred compensation to tell payers what amount of federal income tax to withhold from their payments.

 

Date published: October 14, 2021
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