Uncashed Retirement Checks

The IRS ruled that a retiree is taxed in the year of receipt of an uncashed distribution check and employers need not change reporting or withholding.  Plans now have some useful guidance on how to handle uncashed checks.

However, the scope of the rule is limited to cases where the participant or beneficiary received the check. The IRS promises future guidance on uncashed checks in the case of missing participants or beneficiaries.    

Uncashed Checks Pose Problems for Retirement Plans

Under ERISA, plans have a duty to get any distribution right.  Getting it right includes making payments to the right beneficiary, at the right time, in the right amount, withholding what needs to be withheld, and reporting what needs to be reported.

Uncashed checks pose challenges to all of these tasks. From a legal standpoint, the money still belongs to the plan.  And the plan is obligated to fix that in a way that benefits the participant or beneficiary.

Retirement Checks go Uncashed for a Variety of Reasons

First there is the category of participants and beneficiaries who receive a check but for whatever reason do not cash or deposit it.  They may have accidentally tossed the check because they were not expecting it (for example, a cash-out check for a terminated plan).  Or maybe they sent it back because they believed it is in the wrong amount.  Or maybe they simply lose it or forget to take it to the bank. 

The other major category consists of participants and beneficiaries who never receive the check.  That might be due to a mistake in delivery, sending the check to a noncurrent address, or a loss or theft of a check before delivery.  

This category would also include participants or beneficiaries who are “missing” in the sense that the plan has no idea where they are or how to contact them.  Participants who left the employer years before but have a retirement account balance often fall into this category.  

Uncashed checks are a special problem when a plan is being terminated. Plan fiduciaries open themselves up to liability if they do not make a good faith attempt to find missing participants in these situations. 

Must Withholding be Undone?

Whether a participant or beneficiary received or cashed a check or not, the distribution may have triggered withholding. Unless the intended recipient of the check has elected out of withholding, the plan must withhold at a rate of 10 percent. 

Rollover checks intended as rollovers also are sometimes not cashed.  Mandatory 20 percent withholding applies to rollover distributions, and after 60 days these distributions have to be treated as taxable. However, withholding rules do not apply to direct trustee-to-trustee rollovers.  Direct rollovers typically involve plan participants delivering the check to the new custodian.     

Plans can feel uneasy about whether they should correct withholding if a check is not cashed. They often lack the system to detect that a check is uncashed, much less correct the withholding (especially in a later tax year).  Plus there is the uncertainty of whether it is the right thing to do.  

New Rule for Checks Received and Cashable in Year of Distribution

One of the common complaints in this area is that the main regulatory agencies that police employer plans for fiduciary and tax purposes have provided very little guidance.  The IRS has changed that for cases where the participant or beneficiary receives the check in a timely way.  

The IRS ruled that an uncashed check received by an individual is taxable in the year of receipt whether or not it is cashed in that year or ever cashed.  In addition, the employer’s obligation to withhold tax and report the distribution is unaffected by whether the check is cashed.

This rule applies whether or not the individual keeps the check, sends it back, destroys it, or cashes it in a later tax year.  Note that this applies only if the participant or beneficiary “could cash” the check in the year of receipt.   

Comment: Under the constructive receipt rule for checks, receiving a check any time on or before December 31 of a calendar tax year counts as income in that tax year.  Because the new ruling for retirement checks uses the term “could cash,” it does not seem to apply to an individual who receives the check after banking hours on the last day of the tax year.  

This rule can apply if the check is sent to the appropriate beneficiary or participant at the correct address.  It would not apply however to missing participants and beneficiaries.  

Comment: The fix for a beneficiary or participant who reports a lost or missing check to the plan would be reissuance of a new check. The new check would be treated as if it had been cashed in the distribution year for tax purposes. 

Participants and Beneficiaries Who Cannot be Found

If the problem is that a participant or beneficiary is missing, the plan has far less certainty on how to act. The plan is subject to fiduciary rules and is expected to try to make a reasonable effort to find the missing person. 

The Department of Labor suggests the following no-cost steps for finding missing participants in plan termination situations:

  • send a notice using certified mail to see if the participant can be located;
  • check other employer records or any related plans of the employer for more up to date address;
  • send an inquiry to any named beneficiary who might have more up to date contact information; and
  • use free online search tools including public records data bases, obituaries and social media.

If that fails, the DOL recommends spending some money to try to find a participant if the size of the balance is significant. This might include a hiring a locator service, or paying a credit reporting agency, or information brokers. 

Comment: Although these guidelines are aimed at terminating plans, a plan would be prudent in using this approach for any missing participant or beneficiary.

Comment: Typically, a check returned as undeliverable is a clue that the participant or beneficiary is missing. However, plan might a financial institution to administer distributions in which case the plan’s balance would not be directly affected by a returned check.  So the plan would not necessarily find out a check has not been cashed if it solely relied on returned checks.

What can an Employer do?

Plans should have written procedures for handling uncashed checks.

For employees with accounts under $5,000, a terminating plan can make an automatic IRA rollover for a missing participant. The new IRA is in name of missing participant or beneficiary. This option is available if a participant left employment before electing to receive a taxable cash distribution or roll over assets. 

An employer can restore the participant’s account while correcting withholding and reporting.   

If under $1,000 the plan can treat the amount as a forfeiture, to be held by the plan, and restored if the missing participant or beneficiary is found.  The plan should try to make an effort to find the participant or beneficiaries.


At least there now is a clear rule for the relatively easy case of lost checks rather than lost participants.  The new rule gives plans cover to treat the distribution as they intended to treat it.  That is not to say that it would be okay for a plan to ignore the uncashed status of a check or not have a system in place to identify uncashed checks.  But it is to say that the fix can be done simply by a issuing a new check rather than having to correct an erroneous attempt at a distribution.

The IRS says it is working on guidance for missing participants and beneficiaries.  It cannot come too soon.

By James Solheim, J.D.

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All stories by: CCHTaxGroup