Last week, the IRS denied an employer’s request for tax adjustments or refunds on uncashed 401(a) retirement plan distributions, according to a new ruling. Because the distribution was made, the employer would not be entitled to a refund or federal income tax withholdings on the distribution. Income tax adjustments and refunds are only available when a plan sponsor deducts and withholds more than the required amount or there was an overpayment of taxes due to an administrative error, the IRS clarified in its ruling.
This guidance is particularly relevant for plan administrators dealing with missing plan participants or unclaimed distribution checks. Many retirement plan distribution checks are not received or acknowledged by former employees, becoming a burdensome issue for plan sponsors. Recent estimates indicate that over 29 million forgotten 401(k) accounts exist in the U.S, according to new research by online retirement provider PensionBee.
Income tax adjustments and refunds are only available when a plan sponsor deducts and withholds more than the required amount or there was an overpayment of taxes due to an administrative error, the IRS said in its ruling.
“Employer M is the plan administrator of Plan X, a qualified retirement plan … that does not include designated Roth accounts … hold employer securities, or provide benefits … compensation for injuries or sickness,” read the IRS ruling.
After Employer M’s distribution was made, “Individual C did not earn any additional accrued benefit under Plan X arising from compensation from, or service for, the employer,” read the ruling. The check was not cashed within six months after the date on the check, and the employer cancelled the check. The employer then “mailed a second check in the amount of Individual C’s accrued benefit,” according to the ruling.
With these employer details as reference, the IRS issued the following guidance on uncashed checks: No refund or adjustment is available regarding the amounts withheld and remitted with respect to the first check. Once the check is issued, distribution is complete, according to the IRS. Therefore, the plan is not entitled to a refund or adjustment of those amounts—even if the participant never cashes the check and/or it is later canceled.
If a second check is later issued to the participant (after the first check is canceled due to being uncashed), no additional federal income tax withholding is required, since withholding was already applied to the original distribution. If the second check is for a greater amount due to additional accrued earnings, withholding is required only on the excess amount.
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This ruling confirms that plans cannot recover amounts withheld to the IRS on uncashed checks through adjustments or refunds. Plan sponsors should ensure their procedures for handling uncashed distribution checks align with this guidance, with the understanding that uncashed checks do not relieve the plan of withholding or reporting obligations.
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