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let a distribution check stale date on purpose?


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Participant was forced out of the plan with a balance of under $1000. Participant received the check which was made payable to him but did nothing with it for 90 days. He realized he missed the 60 day rollover window and would rather not claim the funds as income. 

I have never been asked this before - but can he purposefully let the check stale date then ask the record keeper to send a new check? Will that start the 60 window over again? I am guessing no, but thought I would ask the experts. The record keeper refuses to reissue a check to the IRA provider.

Thanks

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On 9/5/2018 at 11:19 PM, WCC said:

Participant was forced out of the plan with a balance of under $1000. Participant received the check which was made payable to him but did nothing with it for 90 days. He realized he missed the 60 day rollover window and would rather not claim the funds as income. 

I have never been asked this before - but can he purposefully let the check stale date then ask the record keeper to send a new check? Will that start the 60 window over again? I am guessing no, but thought I would ask the experts. The record keeper refuses to reissue a check to the IRA provider.

Thanks

Yes, he can "forget" to cash the check or lose it. That doesn't change the fact that he was paid out at that original date and a 1099 is due for that payout whether he cashed the check or not.  The recordkeeper has no choice but to void the earlier check and issue a new one,  But that does not change the actual distribution date and the tax situation that follows from that. This is an easy one.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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8 hours ago, RatherBeGolfing said:

You can reverse the withheld taxes, but I don't think they want to.  It sounds like their position is that the plan followed its terms and cashed him out at under $1,000 and they won't re-do that distribution to let him roll over to an IRA.  Completely reasonable in my opinion.

You can't reverse the withheld taxes if they were withheld. He was paid; some of his distribution was withheld and submitted.  I am confused about mention of the 60 day rollover; there should have been withholding and i assume there was and that it was remitted to IRS. None of that can be reversed.  And since he didn't make the rollover within the window, it is fully taxable and the withholding will help with the tax bill  If he lost the check, a new one MUST be issued, but no change in the taxable event that occurred when the distribution was originally made.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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1 hour ago, Larry Starr said:

You can't reverse the withheld taxes if they were withheld. He was paid; some of his distribution was withheld and submitted.  I am confused about mention of the 60 day rollover; there should have been withholding and i assume there was and that it was remitted to IRS. None of that can be reversed.  And since he didn't make the rollover within the window, it is fully taxable and the withholding will help with the tax bill  If he lost the check, a new one MUST be issued, but no change in the taxable event that occurred when the distribution was originally made.

Reverse was a bad term, the appropriate term would be restore, and it can definitely be done.  The IRS addressed the issue back in 2003 because the PBGCs missing participants program requires the full benefit to be transferred rather than 80%. It is commonly done with missing participants but could possibly apply in this case if the participant continues to refuse to accept the check (recalcitrant rather than missing). 

In the current missing participant debate, some are even advancing the argument that failure to recover withheld taxes from the IRS (for a missing participant) is a possible fiduciary breach. 

 

 

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I think that the underlying technical issue is that under long-standing case law, a taxpayer cannot "turn his/her back" on income, from any source, without being in "constructive receipt" of the income (i.e., it's included in his/her gross income). Receiving the check and not cashing it is "turning your back on income" if you understood that what you had received in mail was a check.

Although the plan administrator would, almost certainly, have no way of knowing, arguably you would get a different result if the taxpayer had moved and did not get the check, or if he or she had thrown it away without opening the envelope, not realizing a check was inside (which might be impossible to do, depending on the envelope).

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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17 hours ago, RatherBeGolfing said:

Reverse was a bad term, the appropriate term would be restore, and it can definitely be done.  The IRS addressed the issue back in 2003 because the PBGCs missing participants program requires the full benefit to be transferred rather than 80%. It is commonly done with missing participants but could possibly apply in this case if the participant continues to refuse to accept the check (recalcitrant rather than missing). 

In the current missing participant debate, some are even advancing the argument that failure to recover withheld taxes from the IRS (for a missing participant) is a possible fiduciary breach. 

I don't understand your response.  In this case, the participant was paid (with a check) and withholding was done.  The PA knows that to be the case (the check was delivered).  That cannot be reversed or restored.and I'm still not sure what restored means.  But in this case, the situation is very clear. 

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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1 hour ago, Larry Starr said:

I don't understand your response.  In this case, the participant was paid (with a check) and withholding was done.  The PA knows that to be the case (the check was delivered).  That cannot be reversed or restored.and I'm still not sure what restored means.  But in this case, the situation is very clear. 

Restore would mean getting the withheld taxes back from the IRS.  The IRS has a process for it

In this case the payment to the participant went stale / uncashed. If he continues to not cash the payment you have a recalcitrant participant rather than a missing participant, but in the current missing participant debate the two are frequently lumped together.  

 

 

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3 hours ago, RatherBeGolfing said:

Restore would mean getting the withheld taxes back from the IRS.  The IRS has a process for it

In this case the payment to the participant went stale / uncashed. If he continues to not cash the payment you have a recalcitrant participant rather than a missing participant, but in the current missing participant debate the two are frequently lumped together.  

Yes, the IRS has a process for getting an incorrect withholding back, and we have done it when necessary..  But this does not rise to that level.  Are you disagreeing? I'm not sure.  I think this situation is clear, no?

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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19 minutes ago, Larry Starr said:

Yes, the IRS has a process for getting an incorrect withholding back, and we have done it when necessary..  But this does not rise to that level.  Are you disagreeing? I'm not sure.  I think this situation is clear, no?

I don't think its completely clear if the participant continues to refuse the check. In that case, there is an argument to be made that that restoring the withholding is the correct approach, even if it just to make sure that the withholding and payment is done in the same year.  It certainly can be done.  The taxation issue has been included in a couple of the recent comment letters on missing and recalcitrant participants as well as a GAO report earlier this year so it is worth mentioning. Also note that I'm not saying its the right thing to do, only that it can be done.

 

 

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On 9/7/2018 at 10:26 PM, RatherBeGolfing said:

I don't think its completely clear if the participant continues to refuse the check. In that case, there is an argument to be made that that restoring the withholding is the correct approach, even if it just to make sure that the withholding and payment is done in the same year.  It certainly can be done.  The taxation issue has been included in a couple of the recent comment letters on missing and recalcitrant participants as well as a GAO report earlier this year so it is worth mentioning. Also note that I'm not saying its the right thing to do, only that it can be done.

OK; well the answer is that it's ABSOLUTELY CLEAR!  He CAN'T "refuse" it when he was already sent it.  There is no argument for anything else; period.  It's taxable.  Order a replacement check and that's the end of it. No only it is not right, it CAN"T be done BECAUSE it isn't right!  

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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On 9/6/2018 at 5:29 PM, Larry Starr said:

Yes, he can "forget" to cash the check or lose it. That doesn't change the fact that he was paid out at that original date and a 1099 is due for that payout whether he cashed the check or not.  The recordkeeper has no choice but to void the earlier check and issue a new one,  But that does not change the actual distribution date and the tax situation that follows from that. This is an easy one.

Agreed !

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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