Still Tax, Even Without the Distributed Cash

Overview


The IRS recently issued guidance on the tax treatment, withholding and reporting for required distributions from tax-qualified retirement plans. Plan sponsors should contact their retirement vendors and trustees to ensure that they implement the tax requirements of the new guidance appropriately for their tax-qualified retirement plans.

In Depth


The IRS recently issued guidance regarding the taxation of certain uncashed distribution checks from tax-qualified retirement plans. Specifically, Revenue Ruling 2019-19 (the Ruling) addresses the tax treatment, withholding and reporting for uncashed checks for required distributions from tax-qualified retirement plans.

Tax-qualified retirement plans (such as 401(k) plans or defined benefit plans) must distribute certain amounts to participants either by law or by the plan’s terms. In many cases, the plan will mail paper checks for required distributions to the participant, less amounts withheld for taxes. But what if the participant does not cash the check? The Ruling provides that the amount of the required distribution must be included in the participant’s income in the year the distribution check is issued, regardless of whether the participant cashes the check. However, if the participant cashes the check in a later tax year, the participant will not incur taxable income in such later tax year.

Similarly, a participant’s failure to cash a distribution check does not alter the plan’s obligation to withhold and pay taxes on a required distribution or to report the distribution as taxable income on a Form 1099-R. Just like the participant, the plan has no obligation to report or withhold income in a later year when the check actually is cashed.

The Ruling, however, covers only those situations where distributions are mandatory under the tax code. The IRS will continue to analyze other situations involving uncashed checks, including distributions to missing participants and beneficiaries and including distributions that are not mandatory under the tax code. In addition, the Ruling does not alter a plan’s obligation to take reasonable steps to find missing participants, as covered in our earlier newsletter.

As a next step, plan sponsors should contact their retirement vendors and trustees to ensure that they implement the tax requirements of the new Ruling appropriately. For more information regarding required minimum distributions, locating missing participants or uncashed distribution checks, contact your regular McDermott Employee Benefits lawyer or one of the authors.