Many plan sponsors face the issue of what to do with uncashed checks. Even if the check is sent to the correct address, the participant or former participant may not cash the check. The IRS issued a Revenue Ruling (Revenue Ruling 2019-19 – Failure to Cash a check From a Qualified Plan) which might influence participants and or former participants to cash the check.
Issues addressed in the Revenue Ruling
• A distribution from a qualified plan in the amount of $900 was made to an individual.
• The individual received the check and could cash the check in the same year.
• The total amount of the distribution was taxable.
• The individual had no investment in the contract within the meaning of IRC §72 (non-taxable
basis).
• The plan in the example does not include a qualified Roth contribution program under §402(A)(b).
• The individual made no withholding election.
• The individual did not cash the check or roll it over.
• The plan sponsor withheld taxes as required under IRC §3405(d)(2).
• The plan sponsor reported the distribution via Form 1099-R.
• The employer is the plan administrator and responsible for the proper operation of the plan.
IRS Holdings
• Failure to cash a check when received does not permit the individual to exclude the distribution from income in the year received.
• If the individual keeps the check, returns the check, destroys the check, or cashes the check-in a subsequent year is considered to be a failure to cash the check when received.
• The employer has withholding responsibility even if the check isn’t cashed.
• The employer has reporting responsibility with respect to the distribution.
Observations
The issues addressed are defined very narrowly and are intended to make a simple point – an individual who receives a distribution check cannot control the year of taxation of the distribution. The fact that it specifies that the check is received by the individual in 2019 and could have been cashed in 2019 leaves out all of the distributions mailed in the latter part of December. It also creates a burden on the taxpayer to document when the check was received (and the term “received” is not defined in the ruling.) It is common practice to withhold and issue a 1099-R based on the date the check is written, not the date the check is received or cashed by the individual. More guidance regarding uncashed checks is needed.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen at ERISAdiagnostics, Inc. or 610-994-7442 and ask for Paul Protos at ATR, Inc. Mary is a co-author of the Form 5500 Preparers Manual publishes by Wolters Kluwer.
