The Internal Revenue Service has released guidance clarifying retirement plan administrators' obligations regarding withholding federal income tax and reporting when a participant's benefit distribution check isn't cashed, resulting in the plan administrator canceling it.
“Revenue ruling 2025-15 is relevant mainly in situations involving missing participants or lost benefits — specifically, when a retirement plan mails a benefit distribution check to a participant who fails to cash the check," Mark Iwry, former senior advisor to the Treasury secretary and current nonresident senior fellow at the Brookings Institution, told ThinkAdvisor in an email.
The IRS ruling "also makes clear that if the plan then tries again to pay the benefit by cutting the participant another check for the same (or a smaller) benefit amount, it need not withhold income tax again," Iwry explained. "If the second check is larger than the first (generally because the participant earned further benefits in the meanwhile), withholding is required, but only on the additional amount of the second check. And the plan generally must complete the proper reporting of all of this to the IRS.”
Futher, if the plan eventually cancels the check because it hasn’t been cashed, after withholding federal income tax from the check and remitting the tax to Treasury, the plan cannot get the withholding tax back, according to the guidance.
The technical guidance comes as "many stakeholders are waiting ... for some major guidance item that is in great demand, such as the final Roth catchup contribution regulations," Iwry pointed out.
"Like most organizations, the IRS needs to manage its workload by delegating appropriately," Iwry said. "This generally means effort devoted to any one project is unlikely to affect progress on the several dozen other employee benefits projects being worked simultaneously by separate groups of tax lawyers and other staff.”
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