IRS ruling release affects DC plans

The Internal Revenue Service recently issued Revenue Ruling 2019-19, which clears up some uncertainties for defined contribution plan administrators about their reporting and withholding obligations when a distribution check issued to a participant goes uncashed. However, other questions remain for administrators.

While the ruling covers checks that a participant receives but doesn’t cash, it doesn’t clarify the position regarding checks never received or those that participants didn’t actually get in the same tax year as the administrator reported the distribution.

Meanwhile, for administrators, determining whether an uncashed check was received may involve many of the same steps as they take to locate missing plan participants. 

What you should know

  • The IRS confirmed that plan administrators are still obliged to withhold income tax for a check that an employee received, but failed to cash—regardless of the reason. An administrator should not request return of the withholding from the IRS for uncashed amounts that have gone back into the plan.
  • Administrators must also report the distribution on Form 1099-R for the year issued, even if the check is uncashed—and the participant cannot exclude the amount from gross income for the year.
  • While returned checks must go back into the plan (with return of withholding requested), the IRS continues to analyze the situation regarding administrators’ obligations if checks sent to an incorrect address are neither received nor returned—or if the participant received a check in a different year than it was issued.
  • To verify addresses for uncashed checks that were not returned, plans should consider employing the same methods they use to find other missing participants. These include search engines, obituaries, social media, beneficiary designations, and participant locator services. Periodically updating records this way can also minimize future problems.
Excise tax on the amount of unpaid distributions a participant who does not take
required minimum distributions can be assessed[1]
Amount at which plan administrators are required to report a distribution to the IRS[2]
Number of participants in workplace plans who left at least one retirement
account behind when changing jobs from 2004 to 2013[3]