The IRS recently issued Revenue Ruling 2019-19. The Revenue Ruling provides 401(k) plan administrators with helpful guidance on how to report and withhold from 401(k) plan distributions when a plan participant actually receives the distribution but, for some reason, does not cash the check.
Unfortunately, this new guidance does not provide answers to the complex issues that 401(k) plan administrators face when the 401(k) plan must make a distribution, but the plan participant is missing.
Let's hope Revenue Ruling 2019-19 is just the first in a series of much-needed guidance from the IRS and the Department of Labor (DOL) about how 401(k) plan administrators should handle the increasingly common administrative issues related to uncashed checks and missing plan participants!
IRS Confirms Tax Withholding and Reporting Requirements for Required 401(k) Plan Distributions Received by the Plan Participant
There are many situations in which a 401(k) plan must make a distribution to a plan participant. For example, plans must distribute small benefit cash outs (e.g., account balances that are $1,000 or less) or required minimum distributions to plan participants who reach age 70½. This may come as a surprise, but plan participants fail to actually cash these checks with some regularity!
In Revenue Ruling 2019-19, the IRS confirmed that 401(k) plan administrators should withhold taxes on a 401(k) plan distribution and report the distribution on a Form 1099-R in the year the check is distributed to the participant, even if the participant (for whatever reason) does not actually cash the check until a later year.
Similarly, the participant needs to include the plan distribution as taxable income in the year in which the plan makes the distribution even if the participant fails to cash the check until a later year. While this guidance is not surprising, it does provide clarity to 401(k) plan administrators as to how they must withhold and report normal course and required plan distributions. In particular, 401(k) plan administrators should not reverse the tax withholding or reporting of the distribution when the participant receives the distribution and simply does not cash the check until a later year.
But What Do We Do About Missing Participants?
Unfortunately, this new IRS guidance has limited use because the Revenue Ruling uses an example that specifically concedes that the plan participant actually "received" the plan distribution check, but simply failed to cash it. So, what should 401(k) plan administrators do when the participant may not have received the distribution check at all (e.g., a check is "returned" for an invalid address) or the plan itself does not have current contact information for the participant?
Retirement plan administrators have an ERISA fiduciary obligation to implement a diligent and prudent process to find missing plan participants and to take additional steps to make sure participants actually receive plan distributions. Uncashed 401(k) plan distribution checks are still retirement "plan assets," which means the 401(k) plan administrator is still subject to ERISA fiduciary standards of care, prudence and diligence related to those amounts. As a result, the IRS and DOL have increased their focus on uncashed checks and missing participants in retirement plan audits.
401(k) plan administrators would be well-served by establishing and implementing a consistent process to stay on top of any missing plan participants or uncashed checks and taking steps to locate those participants and properly address uncashed checks. 401(k) plan administrators should also carefully document the steps that they take in this regard. The IRS and DOL have currently provided (very) limited guidance on the steps a 401(k) plan administrator can take to locate missing participants, but more guidance is needed—let's hope Revenue Ruling 2019-19 is just the beginning!
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