For a variety of reasons,some participants delay, neglect, or choose not to cash distribution checks. Uncashed distribution checks present many difficult issues for plan administrators. In order to clarify some of the taxation issues, the IRS issued Revenue Ruling 2019-19, which addresses the issues of income taxation, withholding, and reporting of distributions when the distribution check is not cashed in the year in which the distribution was made. While the holdings regarding mandatory withholding and reporting are not surprising, the inclusion in income may come as a surprise to participants who delay, choose not to, or neglect to cash those distribution checks.
The specific holdings of Revenue Ruling 2019-19 are:
Inclusion in Income. Unless otherwise not includable in the participant’s gross income (such as in the case of a rollover), the distribution is included in the participant’s gross income for the year in which the distribution is made, even if the distribution check is not cashed in that tax year or any other tax year. (Code Sections 402 and 72
Mandatory Withholding. The plan administrator is required to withhold 20% of the distribution and pay those amounts to the IRS as towards the participant’s federal income taxes. This applies for the tax year even if the distribution check is not cashed during the applicable tax year or any other tax year. (Code Section 3405)
Reporting. The plan administrator is required to report the distribution to the IRS on Form 1099-R for the applicable tax year, regardless of whether the distribution check was cashed during that tax year. If the distribution is under $10, this reporting requirement does not apply. (Code Section 6047(d))
The bottom line is that uncashed distribution checks will receive the same tax treatment as cashed distribution checks, so cashing those checks will benefit participants and plan administrators alike.
Action step: Plan administrators may want to educate their participants about this as well as review their own internal processes and check with their recordkeepers to be sure withholding and reporting are being handled in a manner that complies with the new guidance.
© Boutwell Fay LLP 2020, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of February 29, 2020.