IRS rules on retirement plan check cash failure

Tax Hot Topics newsletterThe IRS held in Rev. Rul. 2019-19 that a taxpayer’s failure to cash a distribution check from a qualified retirement plan does not allow the taxpayer to exclude the distribution from income. It essentially ruled that the receipt of a distribution check from a qualified retirement plan constitutes an actual distribution that is taxable in the year of receipt, regardless of when (or if ever) the recipient actually cashes the check.

Under the facts, a taxpayer’s employer sponsored a qualified retirement plan that does not include a qualified Roth contribution program. In 2019, the employer made a required distribution of $900 from the plan to the taxpayer, withholding tax and mailing a check for the remainder to the taxpayer. The taxpayer had no investment in the contract and never made a withholding election with respect to her plan benefits. Although the taxpayer received the check and could cash it in 2019, she did not do so. She also did not make a rollover contribution with respect to any portion of the designated distribution, and no other exceptions to income inclusion under Section 402(a) applied.

The IRS determined that because the taxpayer had no investment in the contract and no Section 402(a) exception applied, the amount of the designated distribution was includible in her gross income in 2019. Under Sections 72 and 402(a), any amount actually distributed to a plan beneficiary from certain qualified retirement plans is taxable to the distributee in the year distributed. Therefore, the taxpayer’s failure to cash the distribution check does not preclude the distribution from being includable in her income. Furthermore, the employer’s withholding and reporting obligations are not altered by the taxpayer’s failure to cash the distribution check she received. The IRS noted that this tax treatment applies regardless of the reason the check was not cashed in the year of receipt – that is, regardless of whether the taxpayer simply held onto the check indefinitely, sent it back, destroyed it, or cashed it in a subsequent year. 

The IRS also explained in the ruling that it will continue to analyze issues that arise in other situations involving uncashed checks from retirement plans, including situations involving missing individuals with benefits under those plans. Missing participants and uncashed checks in various situations have become a significant problem for many retirement plan sponsors. There has been little guidance from the government agencies on how these situations should be handled.

It is important to emphasize that this particular ruling addressed a narrow and relatively simple fact pattern – a participant who actually received the distribution check, but refused to cash it in the year of receipt. In many cases, a plan sponsor does not know whether a participant has actually received a distribution check – for example, in the case of a missing participant. This ruling does not address whether the same tax treatment should apply if a plan sponsor cannot confirm that a participant actually received a distribution check. Thus, plan sponsors will need additional guidance from the IRS to address these other scenarios involving uncashed checks and missing participants.

Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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