IRS Issues Guidance Regarding Uncashed Check
Posted on September 10, 2019 by Legacy Retirement Solutions
In August of 2019, the IRS issued Revenue Ruling 2019-19 (“Guidance”) which provided guidance regarding the tax treatment of certain types of uncashed checks issued from a tax-qualified retirement plan. The facts presented within the Guidance involved an individual who received a check representing a taxable distribution from a tax-qualified plan and, while able to cash it in 2019, chose not to do so. The best example of such a situation would appear to be an individual who receives a required minimum distribution (“RMD”) in December of 2019 but then chooses to hold the check and not cash it until January of 2020. The Guidance then presents and answers three separate tax questions about such circumstances.
The first question posed within the Guidance is when the uncashed check should be declared as gross income by the recipient. In this regard, the IRS indicates that the distribution is taxable to the participant in 2019 because it was actually distributed in 2019 and could have been cashed by the recipient in 2019. The IRS states in a footnote that it is irrelevant whether the individual keeps the check, sends it back, destroys it or cashes it in a subsequent year. The amount would still constitute gross income for 2019.
The second question posed within the Guidance considers whether the failure to cash the check in 2019 would impact the plan administrator’s withholding obligation in relation to the distributed amount. Unsurprisingly, the IRS states that the recipient’s failure to cash the check does not affect the timing of the plan administrator’s withholding obligation or the plan administrator’s liability for the payment of the tax.
The final question discussed within the Guidance is whether the failure to timely cash the check alters the reporting obligation with regard to such amount. Again, as to be expected, the Guidance indicates that as long as the amount to be reported exceeds the reporting threshold (a meager $10), the recipient’s failure to cash the distribution check does not impact the obligation to report such amount on a 2019 Form 1099-R.
While the specific issues raised and answered within the Guidance are welcome, it is questionable why the IRS thought it was currently necessary to formally address them. This is because the issues considered within the Guidance are examples of relatively well settled points that the IRS has routinely espoused in other contexts and likely were already assumed to be the position of the IRS on these issues by the vast majority of retirement plan practitioners. Notwithstanding, the IRS does include a statement at the end of the Guidance that suggests a broader examination of these issues may be provided in the future.
More specifically, at the end of the Guidance, the IRS states that it is continuing to “analyze issues that arise in other situations involving uncashed checks from…retirement plans…including situations involving missing individuals with benefits under those plans.” The fact that the Guidance is limited to a scenario where the individual actually receives the check is surely quite important to the conclusions drawn therein. Presumably a different result might be warranted if the plan administrator does not possess a current address for the intended recipient and, as a result, cannot successfully issue a distribution check into the possession of such individual. Hopefully, the IRS will take the opportunity in the near future to provide additional guidance on this topic with regard to “missing participants” due to the lack of certainty that surrounds that aspect of this issue.
We hope that this article helped you to better understand this topic. However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.