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Belgarath

HC Participant refuses to cash ADP refund checks

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Just soliciting general discussion. Please ignore plan design issues, it has all been hashed over with the client before!

We have a plan that fails ADP every year, and refunds are made, and of course properly reported. There is one active employee/participant who refuses to cash the refund checks.

Why is an unknown, but I have a personal suspicion that in his pea-sized brain, he thinks that by not cashing them they aren't really taxable, so he doesn't include them when he files his taxes. Just speculating...

So, this has gone on for 3 years now. The Plan has done everything appropriately. What other steps are available? (this isn't someone the employer will fire)

One solution is to keep reissuing checks, (but no reporting or withholding necessary, as it has already been done) as the plan has an obligation to distribute the money. And since there is a distribution fee that is appropriately charged to the participant's account, perhaps when it is pointed out to him that he will get charged $100.00 per check, maybe it will sink into his thick skull.

Any other general thoughts? Does it raise any fiduciary issues - charging him for reissuing checks? It seems to me that it shouldn't. Any limit on the number of times checks can be reissued? Etc.? Just wondering about what real-life solutions you might use in this rather unusual situation.

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The way I would approach this is to simply inform the participant that the money is no longer in the plan (and therefore not invested), the distribution is taxable and has been reported to the IRS (so that if his tax return does not reflect it, he risks the IRS crawling up his ...), and if he doesn't cash the checks (which are no long plan assets), he risks them being escheated to the state - which causes him to risk losing the money (depending on the unclaimed funds statute in the state he resides in).

Bottom line, it's not the plan or the employers problem once the check is properly issued and delivered.

And by the way, if this were my employee (and an HCE to boot) I would question why I had someone making a boat load of money on my payroll who is so STUPID.

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How is an ADP refund reflected on the W-2 form? Will the W-2 form show the taxable earnings after 401(k) salary reductions based on the amount withheld during the year or after adjustment for the ADP refund? Is it handled through corrected W-2 forms? In other words, if the IRS is carefully comparing the W-2s they receive and what the taxpayers are reporting as income, will there be a noticeable discrepancy?

Has the sponsor passed along to the recalcitrant employee that they are reporting to the IRS the reduced 401(k) amounts so the participant can only reflect the lower salary reductions in the income they declare on their 1040?

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ADP refunds are reported on a 1099-R, not a W-2.

And yes, the employee has been told that the distributions are reported to the IRS. As I said, don't know why he refuses to cash the checks.

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A 1099-R would seem to make it even more obvious to the IRS. There is a separate line on the 1040 for reporting what is on the 1099-R. Easier to cross-check one form against the other.

Does the employee have a boss? Has the employee been asked by either HR or that boss why he or she is choosing to make life difficult for the sponsor? It is taxable income in any event, so why not just take it?

Under tax law, is not reporting it but not cashing the check looked at any more favorably than not reporting it but cashing the check?

Just double checking, but is the money pulled from his account whether or not the check is cashed, and not put back under any circumstances?

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Perhaps this is also an opportunity to consult with the big cheese, suggesting one or methods to minimize the refund(s).

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Plan participation is not a protected benefit and this is an HCE. The employer could amend the plan to exclude this HCE from the plan by name going forward. Just a thought.....

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Plan has complied with the applicable law and refunded the excess contribution to the employee and reported it to the IRS.

Plan has no further responsibility to the participant and participant has taxable income under the principles of constructive receipt of income even if he does not cash the check. It is participant's responsibility to report the income on his 1040 and pay taxes.

Plan should not automatically reissue a new check because payment has been included as employees taxable income in year in which check was mailed to participant. Issuing a new check would confuse the taxation issues.

Since the excess payment has been reported to the IRS its up to the Service to send an audit notice to collect the taxes. Given the reductions in IRS budget for compliance its possible that the IRS may not try to collect the taxes before the 3 year S/l expires. If first check was issued in 2012 IRS has until at least april 15, 2016 to issue a deficiency notice.

State escheat laws are preempted by ERISA from applying to qualified plans. Plan can always issue a new check if old check is stale if requested by participant.

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