It’s a question that your plan sponsor clients – and perhaps TPA partners – struggle with – what happens when a qualified plan mails a distribution check, but the check is not (yet) cashed? Here’s what the IRS thinks…
In Revenue Ruling 2019-19, the IRS takes up the issue – and considers three foundational questions about what happens when a qualified plan mails a distribution check, but the check is not (yet) cashed.
It addresses whether the uncashed check is gross income and whether failure to cash the check affects the withholding obligation or the reporting obligation. As discussed previously here, the IRS has determined that if an individual receives a distribution check from a qualified plan and does not cash it, the amount of the designated distribution is includible in gross income and the employer remains subject to withholding and reporting obligations.
The conclusions reached by IRS are not surprising. After all, Code section 402(a) provides that amounts “actually distributed” from a qualified retirement plan are includible in income in the year distributed. The alternative of allowing individuals to delay recognition of a distribution by simply ignoring a distribution check would allow them to delay taxable income, a path IRS clearly does not want to go down. In effect, Section 402(a)’s “actual distribution” language effectively trumps constructive receipt for distributions from qualified plans under which earlier inclusion of income otherwise might be consistent.
Regardless, in practice, section 402(a) generates confounding results for distributions made at or near the end of the tax year that cannot be deposited until the following year. Plan sponsors and service providers face reporting and withholding puzzlers, particularly when actual receipt is lacking due to death or an incorrect address – and, of course, there are many such situations.
We know that the IRS continues to analyze other situations involving uncashed checks, including situations involving missing participants. It’s a good bet that this Revenue Ruling will serve as a baseline for future guidance.
Additional guidance from IRS would be welcome.
Allison Wielobob is General Counsel, American Retirement Association.
