On September 3, 2019, the IRS issued Revenue Ruling 2019-19, which discusses participants’ and beneficiaries’ inclusion of income and qualified retirement plans’ withholding and reporting obligations for uncashed distribution checks. Although the Revenue Ruling describes only a qualified retirement plan under Code section 401(a), the same reasoning would most likely also apply to a Code section 403(b) plan. Under the facts of this Revenue Ruling, a qualified retirement plan must make a distribution of $900 to a participant in 2019. The participant receives the check from the plan but chooses not to cash it in 2019. The IRS ruled that the participant’s failure to cash the check did not relieve her of the obligation to include the amount of the distribution in her gross income in 2019. Similarly, the employer, as plan administrator, was obligated to withhold tax on the distribution that was required to be withheld under Code section 3405. Finally, the employer was required to report the distribution amount on Form 1099‑R, and the participant’s failure to cash the distribution check did not affect this obligation.
These rulings are unsurprising based on existing law, particularly the doctrine of constructive receipt that is codified at Code section 451. The IRS already ruled on a similar factual situation in Revenue Ruling 68-126, for example. In that Revenue Ruling, a taxpayer could have received a retirement benefit check in one taxable year by appearing in person and claiming it but instead waited for the check to arrive in the mail in the following taxable year. The IRS held that “the income is constructively received in the year preceding the year of actual receipt,” and that the retiree therefore had to include the amount of the check in income in the earlier year. A rule that a participant could choose to delay inclusion in income of a distribution until a later year by simply failing to cash a distribution check in the year the plan issued it would also undermine the requirements to take required minimum distributions under Code section 401(a)(9).
Uncashed Checks and Missing Participants
The IRS made a more puzzling statement, though, in the last sentence of the Revenue Ruling. The IRS stated that it and the Department of Treasury “continue to analyze issues that arise in other situations involving uncashed checks from eligible retirement plans[,] . . . including situations involving missing individuals with benefits under those plans.” This sentence implies that the IRS’s ruling could differ if the participant did not receive the distribution check because, for example, the plan administrator mailed the check to an outdated address. However, the IRS does not specify how, if at all, its ruling would differ on these facts. One possibility is that the IRS might not take the position that a participant who never received a distribution check must include the amount of the check in income, and there could be an argument that the doctrine of constructive receipt would not apply in such a case.
On the other hand, the IRS did not state that this ruling would apply to the plan’s withholding and reporting obligations for a distribution to a missing participant, regardless of whether the participant would have to include the amount of the check in income. This omission is curious because, as a practical matter, the timing of when a plan must withhold and report income dictates that this Revenue Ruling would apply regardless of whether the participant were missing. The plan would withhold applicable taxes from the amount of the distribution check before mailing the check to the participant, at which time the plan administrator would believe that it had the correct address for the participant. The plan would also send the Form 1099‑R to the participant by January 31 and file the Form 1099‑R with the IRS by March 31 of the year following the year of the distribution. For a distribution check mailed in December, for example, the plan administrator might not yet know whether the participant had received check by the time the plan would be sending and filing the Form 1099‑R. Additional guidance from the IRS to clarify plans’ withholding and reporting obligations with respect to missing participants would be welcome.
For now, however, there remains little guidance on uncashed checks and missing participants. Prior to this Revenue Ruling, the IRS issued a 2017 memorandum that has since been added to Internal Revenue Manual 126.96.36.199(15)(d). This guidance directs examiners not to challenge a qualified plan as failing to satisfy the required minimum distribution requirements with respect to missing participants if the plan has taken certain steps to locate such participants. Those steps include conducting a search for alternate contact information (address, telephone, email, etc.) that the plan or plan sponsor holds or that is publicly available; using a commercial locator service, credit reporting agency, or proprietary internet search tool for locating individuals; and sending a letter via certified mail to the participant’s last known mailing address and to any other alternate address identified.
We have written before about guidance the Department of Labor (DOL) has issued on missing participants in Field Assistance Bulletin 2014-01. This guidance describes steps plan administrators must take to locate missing participants in order to satisfy their ERISA fiduciary duties with respect to such participants. In the preamble to proposed regulations on the Form 5500, the DOL and IRS have stated that plans should have procedures in place to verify that a participant’s address is accurate before mailing a check. The proposed new Form 5500 would also add a new question asking plans to report the total number and value of uncashed checks and to describe the plan’s procedures both to verify a participant’s address before mailing a check and to locate missing participants. Though it seems unlikely that these proposed regulations will be finalized in the near future, the proposed changes to the Form 5500 indicate that the DOL and IRS are focused on plans’ procedures for monitoring uncashed checks.
Revenue Ruling 2019-19 suggests that the IRS and DOL may be planning to issue additional guidance on uncashed checks in the future, and plan administrators are likely to welcome greater certainty concerning their obligations in this area.