woman in suit handing check over The Revenue Ruling states that the guidance equallyapplies to situations in which the participant chooses to not cashthe check, sends the check back to the payor, destroys the check,or cashes the check in a subsequent year. (Photo:Shutterstock)

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

  • Includible in the participant's gross income for the year inwhich 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 theplan administrator (or employer)

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

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Plan administrators and plan service providers should reviewtheir uncashed check processing procedures to confirm that suchprocedures align with this guidance.

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

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

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The situation described in the Revenue Ruling is one in whichthe plan is required to make a distribution and the participantreceives the distribution.

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

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And, it seems reasonable that a plan administrator may assumethat a check for a requested (or required) distribution is receivedby the participant, absent the check being returned asundeliverable, in the year in which the distribution is made.

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

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Plan administrators should consult with their plan serviceproviders to determine how uncashed checks that are undeliverableare handled. Plan administrators should consider whether thetreatment of undeliverable distribution checks appropriatelyaddresses any tax withholding and tax reporting issues.

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In addition, a review of participant communications may revealopportunities to clarify for participants that plan distributionsare taxable (and includible in gross income) in the year in whichthe distribution occurs, regardless of whether the check is cashedor cashed in a later year.

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The IRS states that it will continue to review situationsinvolving uncashed checks and missing participants, so additionalguidance is expected on this issue.

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However, the Revenue Ruling makes clear that participants maynot alter the timing of when a plan distribution is subject toapplicable tax withholding and reporting, or when the distributionmust be included in their gross income, either by failing to cash adistribution check or by cashing it in a later year.

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

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