Tax Law Defined® Blog

To Cash or Not to Cash? Tax Treatment for Uncashed Retirement Plan Checks

In Revenue Ruling 2019-19, which was issued on August 14, the Internal Revenue Service (IRS) confirmed that a taxable qualified plan distribution is taxable in the year it is distributed, even if the participant does not cash the check or cashes the check in a subsequent year.

The IRS also confirmed that the employer’s withholding and reporting obligations are unaffected by the participant’s failure to cash the check in the year that the distribution occurred. This guidance is a part of an ongoing effort by the IRS to address issues involving unclaimed checks and missing participants.

Rev. Rul. 2019-19 addresses a factual scenario where a taxable plan distribution in the amount of $900 is required to be made to a participant in 2019. The employer as plan administrator withholds tax as required under Code Section 3405(d)(2) and mails the check to the participant. The participant receives the check in 2019 but does not cash the check in 2019 even though she could have done so. The questions presented are whether the participant’s failure to cash the check in 2019 (or ever) allows her to exclude the distribution from income in 2019 or otherwise alter the plan administrator’s withholding or reporting obligations.

The analysis set forth in Rev. Rul. 2019-19 on these facts is fairly straightforward and the holdings are unsurprising. It does not seem reasonable that a participant should be able to alter the timing of plan administrator’s withholding and reporting obligations or the timing of when a distribution is includible in income by simply choosing not to cash a check. In fact, the IRS notes that the result is the same regardless of whether the participant keeps the check, sends it back, destroys it or chooses to cash it in a subsequent year.

But, as many commentators have pointed out, Rev. Rul. 2019-19 addresses facts where the participant actually received the check and elected not to cash it in 2019. In other words, it is a relatively easy case. Many of the issues involving uncashed checks or missing participants are more complicated. Often an uncashed check is not actually received by the participant to whom it was sent. Additionally, many checks sent to incorrect addresses are returned to the plan administrator. It will be interesting to see whether the IRS weighs in on the same issues in connection with a more challenging set of facts as it moves forward in its efforts to analyze issues involving uncashed checks and missing participants.

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Attorney Spotlight

Alison M. Stemler is FBT’s Employee Benefits Team leader. She advises on executive compensation and employee benefits plans, including equity-based and deferred compensation arrangements, and assists with compliance issues for retirement and welfare plans and HIPAA.