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Withholding, Reporting Still Required for Uncashed Distribution Checks

Practice Management

The IRS has determined that if an individual receives a distribution check from a qualified plan and does not cash the check, that individual cannot exclude the amount of the designated distribution from gross income and the employer remains subject to withholding and reporting obligations. The IRS issued this determination in Revenue Ruling (Rev. Rul.) 2019-19.

In the scenario that the revenue ruling addresses, the employer is the plan administrator of a qualified retirement plan under Code Section 401(a) that does not include a qualified Roth contribution program under Section 402A(b). The plan must make a distribution of $900 to an individual in 2019. The individual:

  • has no investment in the contract under Section 72 regarding the benefit;
  • has a calendar-year taxable year; and
  • has never made a withholding election regarding the benefit under the plan.

The employer makes the required distribution, which is a designated distribution under Section 3405(e)(1), by withholding tax as required under Section 3405(d)(2) and mailing a check for the remainder to the individual.

Although the individual receives the check and could cash it in 2019, the individual does not do so. The individual also does not make a rollover contribution regarding any portion of the designated distribution, and no other exception to income inclusion under Section 402(a) applies.

Holding

The IRS held that the individual’s failure to cash the distribution check does not permit the individual to exclude the amount of the designated distribution from gross income under Section 402(a). Says the IRS:

“Section 402(a) provides that, except as otherwise provided in §402 (for example, a rollover under §402(c)(1)), any amount actually distributed to a distributee by an employees’ trust described in §401(a) which is exempt from tax under § 501(a) is taxable to the distributee, in the taxable year of the distributee in which distributed, under §72. Section 72 provides rules relating to inclusion in gross income of amounts received from qualified plans and certain other arrangements.

“Under §402(a), the amount of the designated distribution is actually distributed from Plan X to Individual A in 2019. Because Individual A has no investment in the contract within the meaning of § 72 and no exception to §402(a) applies, the amount of the designated distribution is includible in her gross income in 2019. Individual A’s failure to cash the distribution check she received in 2019 does not permit her to exclude the amount of the designated distribution from her gross income in that year under §402(a).”

The IRS also held that the individual’s failure to cash the check does not alter employer’s obligations regarding withholding under Section 3405 and reporting under Section 6047(d).

The ruling says that the Treasury Department and the IRS continue to analyze issues that arise in other situations involving uncashed checks from eligible retirement plans described in Section 402(c)(8)(B), including those involving missing individuals with benefits under those plans.

Rev. Rul. 2019-19 will appear in Internal Revenue Bulletin (IRB) 2019-36 on Sept. 3, 2019.

All comments
Barry Greenstein
4 years 7 months ago
I have a terminated DB plan under PBGC audit. A participant that had a lump sum check cut in 2018 has been returned due to being uncashed for over 6 months. Withholdings were submitted to the IRS as required. I need to get the money out of the plan in order to wrap up the audit. I would like to auto-rollover the money, but then the participant would have another distribution that is not taxable. Any feedback on this would be appreciated.