The Revenue Ruling states that the guidance equally applies to situations in which the participant chooses to not cash the check, sends the check back to the payor, destroys the check, or cashes the check in a subsequent year. (Photo: Shutterstock)

Benefit plan administrators and plan service providers received IRS guidance on what to do when a participant in a tax-qualified retirement plan receives a plan distribution but does not cash the check or cashes the check in a later year. According to IRS Revenue Ruling 2019-19, the distribution is:

• Includible in the participant's gross income for the year in which the distribution occurs
• Subject to applicable tax withholding by the plan administrator (or payor) when the distribution is made
• Reportable on Form 1099-R for the year of distribution by the plan administrator (or employer)

The Revenue Ruling states that the guidance equally applies to situations in which the participant chooses to not cash the check, sends the check back to the payor, destroys the check, or cashes the check in a subsequent year.

Plan administrators and plan service providers should review their uncashed check processing procedures to confirm that such procedures align with this guidance.

Generally, when a plan distribution is processed, the plan administrator applies the applicable tax withholding to the gross amount of the distribution and the check is issued for the net amount. Assuming the check is not returned as undeliverable, the plan administrator will report (after the end of the tax year) on a Form 1099-R the distributions made from the plan during the tax year.

A participant should include any reported distribution in his or her gross income for that same tax year.

The situation described in the Revenue Ruling is one in which the plan is required to make a distribution and the participant receives the distribution.

Nevertheless, given the practicalities of plan administration, it seems reasonable that the consequences of a participant failing to cash a distribution check (or cashing it in a later year) would also apply to a situation in which the participant requests a distribution.

And, it seems reasonable that a plan administrator may assume that a check for a requested (or required) distribution is received by the participant, absent the check being returned as undeliverable, in the year in which the distribution is made.

The Revenue Ruling does not address situations in which a check is returned as undeliverable, even if the participant requests the distribution.

Plan administrators should consult with their plan service providers to determine how uncashed checks that are undeliverable are handled. Plan administrators should consider whether the treatment of undeliverable distribution checks appropriately addresses any tax withholding and tax reporting issues.

In addition, a review of participant communications may reveal opportunities to clarify for participants that plan distributions are taxable (and includible in gross income) in the year in which the distribution occurs, regardless of whether the check is cashed or cashed in a later year.

The IRS states that it will continue to review situations involving uncashed checks and missing participants, so additional guidance is expected on this issue.

However, the Revenue Ruling makes clear that participants may not alter the timing of when a plan distribution is subject to applicable tax withholding and reporting, or when the distribution must be included in their gross income, either by failing to cash a distribution check or by cashing it in a later year.

Beth Miller is a member of the Employee Benefits practice group at Spencer Fane LLP in the firm's Overland Park, Kansas, office. She helps clients by identifying practical solutions to a wide variety of legal matters in the areas of employer-sponsored retirement plans, executive compensation, fiduciary obligations, and advisory services.