Qualified retirement plan sponsors now have answers to a few of the questions they have tossed around for years about the tax treatment of uncashed retirement distribution checks.
In Revenue Ruling 2019-19, August 14, 2019, the IRS provides guidance regarding the tax treatment of distribution checks cashed in a year other than the year of distribution or not cashed at all.
The IRS clarifies that if a participant or beneficiary does not cash a distribution check in the year of issuance, the individual must still include the amount in gross income for that year. In addition, if any withholding is required on the distribution, the issuer must withhold and report for the year in which the distribution is made, regardless of whether the check is cashed in the same year. In addition, the 1099-R is issued for the year of distribution and must reflect the distribution amount and amount withheld.
Unfortunately, the IRS did not take this opportunity to provide clear guidance around what to do when a distribution involves a missing or lost participant. In this ruling, the IRS states that it is still analyzing the missing participant issue. Presumably, this means that if a check is returned to a plan as undeliverable this IRS guidance does not apply.
Even without guidance on the missing participant issue, this IRS ruling provides welcome clarity in an area that was confusing for participants and plan administrators alike. In addition, it may provide needed encouragement to participants and beneficiaries to cash distribution checks in a timely manner. The result would relieve the plan administrator’s need to continue to track the distribution checks and eliminate any possible need for amended tax returns for the participant or beneficiary.
If you’ve administered a retirement plan
for any length of time, then you’ve probably “sung the blues” at some point
when it comes to distributions to beneficiaries. Whether it’s the hassle of
incomplete beneficiary designation forms; the mathematical mystery of a split
among beneficiaries that equals 110%; the puzzle created when a primary
beneficiary is allocated 50% of the benefit and the “contingent beneficiary” is
apparently allocated the other 50%; or the dilemma, in the face of no form,
when a daughter submits the deceased participant’s last will and testament as
evidence of her mother’s intent, you know the pain of the beneficiary blues.
How to avoid the blues
the plan for beneficiary provisions. The first thing you should do is
review your plan and ensure it has a default beneficiary provision. It should
state something along the lines of “in the event that a participant fails to
name a beneficiary or the named beneficiary, or any successive or contingent
beneficiary, predeceases the participant, or the designation is invalid for any
reason, then the benefit will be distributed in the following order of priority
to . . .” Alternatively, the plan may reference the order of priority provided
in the intestate law for the state of the deceased participant’s residency. In
either case, you will have a ready answer when you discover too late that no
beneficiary has been validly designated to receive a deceased participant’s
benefits. If you are unable to find such language, take the appropriate action
to have your plan amended to add a default beneficiary provision.
In addition to the default beneficiary
provision, there are other helpful provisions when it comes to determining the
appropriate beneficiary in a complicated situation. A plan may provide that a
properly completed beneficiary designation form submitted to the administrator
revokes all prior designations, and that, except for specified events, a
divorce decree automatically revokes a participant’s prior designation of a now
former spouse as beneficiary.
beneficiary designation forms carefully and immediately upon submission. Reviewing
beneficiary designation forms when they are first submitted will not avoid the
issue created when a sole beneficiary passes away prior to the participant, but
it will avoid the above mentioned 110% and 50% problems. In those cases, the
administrator admitted that they thought a quick glance for beneficiary names
and social security numbers, as well as the participant signature, was all that
was needed. Before accepting a designation form from a participant’s lawful
agent, keep in mind that a power of attorney must specifically authorize an
agent to designate a beneficiary. A simple reference to your retirement plans,
or retirement benefits in general, is not enough. As in many aspects of plan
administration, creating a checklist of required review steps will prove
helpful to you.
Know your options when you’ve
got the blues
Get all the information you need for your determination. Where it is unclear on the face of all the plan documentation who the proper beneficiary is, you have to make a preliminary determination. You must decide whether you possess, or can obtain, enough information to make the beneficiary determination yourself, or if you need to ask a court to issue a declaratory judgment as to the proper beneficiary. You may consider numerous circumstances in processing your determination. You can take into account whether there is employer information outside of plan records, such as a life insurance beneficiary form, that provides you with confidence that your interpretation of a fuzzy beneficiary designation form is appropriate. You may also want to consider whether the relative size of the benefit means that imposing your interpretation of an unclear form is a low risk proposition and the costs of obtaining a declaratory judgment are disproportionately high, or vice versa.
Remember you’re wearing your fiduciary hat. Keep in mind that directing the distribution of retirement plan benefits is a fiduciary act. You must weigh carefully all of the circumstances surrounding the assessment of a beneficiary designation form, and appropriately process your determination. You may want to consult with your trusted advisors or even obtain an opinion from legal counsel.