Cash Your Retirement Plan Distribution Check! IRS Rules Participant’s Uncashed Check Includable in Gross Income

A recent revenue ruling issued by the IRS addressed whether an uncashed check, in this particular instance a retirement plan distribution check, was still included in an individual’s gross income. The IRS confirmed that an individual’s withholding and reporting obligations were the same regardless of whether the check was cashed or held.

As a general rule, amounts distributed to plan participants as part of a 401(a) qualified retirement plan are included in the taxable gross income of the participant in the tax year in which the amount was distributed. The amount of the distribution that is above the investment, or the amount of the income that is based on the plan’s earnings, is what’s included in gross income. While there are some exceptions to this rule, such as when the distributed amounts are rolled into another qualifying plan, failure to cash the distribution check is clearly not one of those exceptions.

Withholding Based on Retirement Plan Distributions

The plan administrator is responsible for withholding and payment of required taxes unless the plan administrator directs the payor to withhold the tax and provides the payor with the necessary information to do so. The employer who maintains the retirement plan must file reports and tax returns on the plan during any tax year where the distributions to an individual are greater than $10. A Form 1099-R is filed for each individual who received a distribution, including both the total amount of the distribution and the taxable amount.

Failure to Cash

When the IRS considered the fact pattern for their recent revenue ruling, they noticed a few things. First, the distribution was made via check and reported in one tax year. The individual who received the distribution had time to cash the check within that tax year, and the distribution was not rolled into another qualifying account. Failure to cash the check did not preclude the income from counting for tax purposes. The employer in the fact pattern appropriately reported the income and withheld taxes due on the income and paid those taxes to the IRS, regardless of the individual’s failure to cash the check.

The bottom line of this ruling, based on the fact pattern and rules that have not changed since the 1980’s, is that income from a retirement plan is taxable in the tax year in which the distribution is made unless it meets one of the specified exceptions.

Businesses are required to report retirement income distributions and withholdings to the IRS. Giving individuals the ability to hold a check and not cash it or count it toward income would create a complication in the tax process. There are other ways individuals can avoid having the income count, including following the exceptions and rolling it into another qualifying account.

The attorneys at Hall Benefits Law pay attention to revenue rulings so we can better assist our clients in communicating with their employees and understanding the likely outcome of a particular situation. To learn more, reach out today by calling 678-439-6236, or visit the Hall Benefits Law website.

The following two tabs change content below.

Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

Latest posts by Hall Benefits Law, LLC (see all)