November 21, 2019

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Still Tax, Even Without The Distributed Cash

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 minimum amounts to participants after they retire or reach age 70½ (required minimum distributions). In many cases, when a participant reaches age 70½, the plan will mail paper checks for required minimum 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 minimum 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. 

© 2019 McDermott Will & Emery

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About this Author

stepanovic, chicago, associate
Associate

Rick Stepanovic focuses his practice on employee benefits and executive compensation matters. He has experience working on matters related to tax-qualified pension plans, health and welfare plans, and deferred compensation arrangements. He also has experience handling correction and administrative matters before the Internal Revenue Service and the Department of Labor.

While in law school, Rick was the Managing Editor of the Michigan Journal of Environmental and Administrative Law. He previously worked as a law clerk in the US Attorney’...

312-984-2054
Diane M. Morgenthaler, Corporate Tax Planning Attorney, Retirement Plans for Companies, McDermott Will Emery, Chicago Law Firm
Partner

Diane M. Morgenthaler focuses her practice on employee benefits and executive compensation. She represents clients in matters before the US Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation.

Diane serves as employee benefit counsel to Fortune 500 corporations and other global corporations, and represents both public and private clients. She regularly designs and implements a variety of employee benefit plans and programs. Diane has extensive experience in employee benefit issues involved in acquisitions, reorganizations and divestitures and in the design of employee benefits plans following such transactions. She also advises clients in matters involving multi-employer withdrawal liability, fiduciary liability and benefit claims.

Diane’s experience includes:

  • Representing a Fortune 500 company in its $8.5 billion tax-free spin-off
  • Representing a company in one of the year's largest private transactions
  • Implementing an offshore pension plan for a company's global expatriates
  • Implementing a lump-sum window for a pension plan as part of a company's de-risking strategy

Since 2004, Diane has been ranked by her peers as a “Leading Lawyer” in a survey published by the Law Bulletin Publishing Company.  Since early 2009, Diane also has been named as an Illinois Super Lawyer by Law & Politics.  Finally, she was selected to the Legal 500 in 2011, and is the senior editor of EmployeeBenefitsBlog.com.   

312-984-7676
Stephen Pavlick Employee BenefitsLawyer, McDermott Will Emery Law firm
Partner

Stephen Pavlick is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C. office.  He focuses his practice on the area of employee benefits matters for large multinational corporations.  His clients include several Fortune 100 companies and a major trade association.  He is a member of the Tax Management Advisory Board for Compensation Planning and is a regular participant at their monthly luncheons with government officials.  Stephen is a Certified Public Accountant. 

Mr. Pavlick concentrates on qualified...

202-756-8312