Alert / Retirement
Participants still pay taxes, even if they don’t cash their checks

When a retirement plan issues a check to a participant that goes uncashed, how does the plan handle the taxes and reporting? This is a common problem for required minimum distributions (RMDs). The Internal Revenue Service (IRS) recently affirmed that a participant’s failure to cash a distribution check does not alter the plan’s withholding or reporting obligations.

In Revenue Ruling 2019-19, the IRS used a common example: A plan issues a participant’s fully taxable RMD and withholds the proper amount from the distribution. It then sends a distribution check, minus the taxes, to the participant, who fails to cash the check. The IRS notes three points:

  • The distribution amount will be included in the participant’s gross income (including the amount that the plan withheld) in the year of distribution, despite the participant’s failure to cash the check. The IRS points out that it does not matter what happened to the check (the participant kept it or sent it back, or their dog ate it). This prevents a participant from “choosing” their year of income exclusion by holding on to it.
  • The plan should withhold taxes from the check to the extent required by Code Section 3405(d)(2), despite the check not being cashed.
  • The plan must report the distribution as a taxable distribution on Form 1099-R for the year of distribution, the same as if the participant had cashed the check.

While this guidance helps plan sponsors who, in most cases, cannot know when a participant cashes a distribution check, and it aligns plans’ withholding and reporting obligations to the time checks are issued, problems remain. The ruling does not address other common problems such as undeliverable checks, deceased participants or designated Roth account distributions.

The biggest challenge is addressing missing participants whose last known address may be incorrect. In those cases, when a check is issued, unless it is returned, there is no way for a plan to know if the participant received the check. The IRS and Department of Labor have indicated an awareness of this problem and hope to issue future guidance. Until then, plan sponsors will want to continue to have a well-documented and prudent process.

For more information, contact your Lockton Retirement Services team.

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