Advisors should take heed to a recent IRS ruling on uncashed distribution checks because it may require clients to take required minimum distributions (RMDs) early, warns IRA expert Ed Slott.
The IRS on Aug. 14 warned missing or unresponsive retirement plan participants that uncashed distribution checks from qualified retirement plans are taxable.
“If the IRS really intends to apply the distribution rule to all company plan payouts,” Slott told ThinkAdvisor in a Monday email message, “advisors will need to advise clients to request distributions,” including RMDs, “early enough in the calendar year to avoid any cross-year confusion, so the client will know that the distribution applies to the prior year, even if cashed or received early the next year.”
Revenue Ruling 2019-19, issued on Aug. 14, applies to a participant who receives, but neither cashes nor rolls over, a distribution check.
“Because Internal Revenue Code Section 402(a) provides that any amount actually distributed from a qualified retirement plan is taxed under Section 72 in the year distributed (subject to the rollover rules), the ruling holds that the participant is taxed on the distribution check in the year she receives it, even if she does not cash it,” Eversheds Sutherland attorneys explained in a recent alert.
Slott added that if the IRS also intends “to apply the rule to IRA distributions, that would be another reason for advisors to persuade their clients to take qualified charitable distributions (QCDs) early in the year, to avoid the same confusion as to which year the distribution applies – to the year distributed or the year the check was cashed.”
IRS is ruling that the distribution will be recorded in the year distributed, even if not cashed until a later year, Slott explained.
There will be times, however, where a plan sends a distribution check to an ex-employee and the address on file is not correct, Slott continued.
Maybe because the ex-employee moved, or “it may be that the employee does not eventually receive the check until a year later. That employee will have a tax problem, since under this ruling that employee will have been deemed to have received the check and will owe tax for the year of distribution. That will be a continuing issue for these employees.”
Slott warns: “Advisors who have clients that leave companies and expect future distributions from that company’s 401(k) should immediately update the company with any change of address so they receive timely distributions.”
Rev. Rul. 2019-19, Slott explained, was intended to address a question that has long been faced by plan administrators: “What are their withholding and reporting obligations when they issue a check that goes uncashed? The IRS made clear that those obligations arise in the year of distribution and are not changed by the fact that the check is not cashed.”
Does the taxation ruling apply to IRAs as well as to workplace plans? “The IRS gave no indication that the ruling also applies to distributions from IRAs,” Slott said. “However, the IRS did not specifically say that the ruling is limited to Section 401(a) plans,” or 401(k)s.
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