Uncashed/stale-dated checks to be returned to Trust assets

[Guest Iwonder]

Can the assets in an uncashed/stale-dated check be returned to Trust assets, or is the amount of the distribution deemed never removed from the Trust until the check has been cashed? I seem to remember reading that distributions, once checks have been drawn, are deemed to no longer be Trust assets and can't be returned to Trust Assets....am I mistaken?

Also, if I am mistaken and uncashed checks are assumed to NOT have left Trust assets, are the funds still considered pre-tax?

Is there anyone who can shed some light on this for me? Thank you.

[Guest AZ Consultant]

Assuming these are distribution checks for terminated participants, I believe you are stuck with going the lost participant route. If the plan is active, it may provide for the amounts to be forfeited if the participants cannot be located. If the plan is terminated and the trust account zeroed out, my recommendation would be to leave them uncashed checks on your list and work from there. You do not want to re-deposit them and re-open the trust account.

[GBurns]

How could the Trust bank account or any account be zeroed out if there are uncashed checks? The uncashed checks would be outstanding and the amounts would still be in the account. With a remaining balance in the account it could not have been closed and therefore there should be no need to "re-open".

I do not have an authority to cite, but logic dictates that until a recipient cashes the check how can the money be anything but still plan assets. A payroll check is not paid if the employee never receives it. Your mortgage is not paid if the servicer does not receive the check. Drawing and mailing a check has never been proof of payment for anything, So why would it be otherwise just because it comes from a QP?

[Guest AZ Consultant]

In trust accounting systems, when funds are disbursed they are shown as a debit to the account. Trust operations departments track all outstanding checks so the department can follow up. For a terminating qualified plan, the trust department can produce a zero asset statement when distributions have been completed so the plan can file a final 5500.

[WDIK]

my recommendation would be to leave them uncashed checks on your list and work from there.

Where do you go from there?

[E as in ERISA]

This is different than an individual checking account. The bank writes the check. The trust account is immediately debited. It is not clear what the DOL's position is if the check is not cashed. There are some remarks that say it is trust assets. Which means it should be credited back to the trust account if not cashed.

[Guest AZ Consultant]

That's the whole problem. It has never been clear where to go from there. We'd decided to apply lost participant procedures for the uncashed checks, document all of it and eventually escheat if state law permitted. This was for a terminated plan where the employer was out of the picture leaving the Bank to deal with the mess. For an existing plan, the Corbel documents we were using permitted forfeiture is the participant could not be located and said what needed to be done to come to this conclusion.

[Bird]

Yes, it's convenient from a recordkeeping standpoint that trust or brokerage accounts actually show the debit when the money is taken from the account, but (I think) the money flows through the bank/brokerage firm's "main" account and they may or may not ever let anyone know if it wasn't cashed. I guess they follow regular escheat procedures or whatever they do with other uncashed checks, which really isn't proper for retirement plan funds. But we are generally (blissfully) unaware of such a result. I think I remember one case where a participant appeared a few years after "payment" and it was determined that the check wasn't cashed; I think we just had the brokerage firm reissue at that point (and ignored the 1099 issues).

It's not clear what the actual situation is so maybe we're all going on a tangent. If it was a plan checking account, then I'd say the distribution was never completed.

[GBurns]

I assumed that it was from a plan checking account. If it was from a Trust, Custodian, Brokerage etc then it would be very unlikely that the OP would have known factually that the check was not cashed.

[Guest pnnenno]

I would like to add an addition aspect to this situation from a 5500 and participant count stand point.

The recordkeeper and the trustee are two separate organizations. A terminated participant requests a distribution, and a check is issued but returned to the trustee, and the trustee redeposits the funds into a Plan asset (a cash management vehicle). The recordkeeper zeros out the participant’s and no longer shows him on the Plan’s records.

I would think that the distribution would be reported as a payable on the 5500 since it is still actually in the trust. But, my question is, is this individual still considered a participant for 5500 purposes (count between large and small plans).

[Bird]

I'd say this person is still a participant, and the recordkeeper has to adjust its records accordingly.

[Guest AZ Consultant]

We have a real life situation and here is what happened. A participant put a $24,000 distribution check payable to his rollover IRA in a desk drawer back in 2004. Now he found it. However the plan trustee has changed. Research revealed that the former trustee cancelled call uncashed checks when the account left and forwarded the funds to the new trustee as forfeitures with a list of what the total represented. All recordkeeping systems show the participant's account balance as zero since he was totally distributed. Now we are working with the employer to have the new trustee issue a replacement check. I don't know yet whether those forfeitures are "just sitting" or if they were used. Hopefully the former!

[wsp]

Seems the IRS and the DOL are at odds with this one. How can you redeposit if the distribution is no longer rollover eligible???

IRS says that receipt of check begins the 60 day countdown. So, to me anyways, when that period ends the check can no longer be run through the trust. At that point then the funds should be transferred in an account separate from the trust account thus preventing their use as a forfeiture.

If the distribution were originally a rollover then a revised 1099-R should be issued making it taxable in the original year. I'd guess that withholding should also be taken and submitted with a revised 945 being issued as well (though I'm not 100% sure on that one).

Also would tell you what to do with the 5500. As of 3/1 all stale date distributions revert to non-participant status. Typically this is before the 5500 is completed so it's simply a matter of annually contacting the custodian and asking if any checks are stale.

Bottom line is that if the participant waits longer than 60 days then he/she needs to argue their case before the IRS and not me. I'm not in the business of issuing PLR's.

Of course I could be way off base on this interpretation. It's simply my opinion and is very conservative one.

[jevd]

I agree with WSP. A PLR is in order but I doubt if the IRS is going to be willing to OK a Rollover based on the participant's forgetfullness. A $24,000.00 check would indicate a $30K distribution with 20% ($6,000.00) withholding. Did the participant get a 1099R. It would seem that that should have awaken him to the fact that he received a distribution. Is he so affluent that he didn't notice that he was missing $24K? Its an interesting situation but $ 24,000 isn't something I'd just put away and forget about.

[Guest mjb]

wsp: The post states the the check was payable to the employee's IRA as a direct rollover so the 60 day period for distribution to participant does not apply since it was never constructively received by the participant.(IRC 408(d)(3)). Q is how did participant list the distribution on his 04 tax return - as a rollover by putting down 0 as taxable income or was the 24k taxed as a distribution. Since he never received the funds in his name as a distribution the plan can issue a new check to the rollover IRA if the amount was not included as income in his 04 return. If he included it as income in 04 he needs to consult a tax advisor to see if he can amend his 04 return and rollover the funds.

[Guest AZ Consultant]

The original check was a rollover made payable to the IRA provider. Everyone at my office wishes they had enough money that they could just put a $24,000 check in the drawer and forget about it! You are correct in that the participant would have received a 1099-R which should have reminded him. It didn't! What's really interesting is that he wants to put the money back in the plan that distributed it but, of course, he can't do that since he's received a total payout and is no longer a participant. Haven't dealt with the 1099-R issue yet. My initial thought is to issue one currently showing the rollover so things "match" for the participants 2006 tax year. That still leaves the original 1099-R that possibly needs to be "corrected" to show a distribution of zero, but that doesn't make sense since the trust indeed distributed the money.

[Bird]

I agree with doing a 2006 1099-R showing the distribution (assuming that you're going to re-do it now). I don't think I'd worry about the old 1099-R if no problem arose from it.

I didn't quite follow if the money was or was not forfeited...if not, then just re-write the check and be happy. If so, then I guess you have to consider whether to try to un-do the prior forfeiture that was not appropriate, or hope you have enough current forfeitures to cover it.

It's simply amazing the different ways people can make our lives difficult.

[jevd]

oops. missed that the check was made payable to IRA but participant still should have received a 1099R and included the information regarding the rollover on his 1040.

[wsp]

Ok, I'm in agreement with the direct rollover not triggering the 60 day rule....wasn't differentiating between rollover and direct rollovers.

Now, I've got a chance to get some practical knowledge here...

Assuming that there was obviously no constructive receipt by the rollover trustee then the money should have been redeposited back into the trust and the account reinstated once the check became stale (instead of being placed into that forfeiture account). Given that it's almost 2 years later would the distribution paperwork still be valid? Can you reissue a check based upon a signature and a request that's 2 years old?

If it is still valid, what should happen if the original rollover option is no longer available? Does that negate the paperwork?

This type of situation (2 year old lost checks) is rare, but we often have residual distributions that need to be paid and some are 12-14 months after the original distribution. I would think that the same concept would hold true for these as well.

[Guest AZ Consultant]

No, it's my understanding the distribution paperwork is no longer valid once it's more than 90 days old. It turns out this person doesn't want to roll as intended two years ago so the new check will end up payable to another IRA provider to be determined. How we will be getting to that result hasn't been finally determined yet.

[wsp]

No, it's my understanding the distribution paperwork is no longer valid once it's more than 90 days old. It turns out this person doesn't want to roll as intended two years ago so the new check will end up payable to another IRA provider to be determined. How we will be getting to that result hasn't been finally determined yet.

And if he doesn't want to roll it at all? What now? Do you amend the prior 5500's? or take the easy and not correct way and show it as a rollover into the plan. After all the distribution never actually took place so it should have been shown as a plan asset all along.

This one little topic shows how quickly the most innocuous of transactions can blow up on us 2-3 years down the road. Imagine if he was the trigger to moving from a small plan to a big plan in 2005. Plan sponser ends up being on the hook for the forfeiture reinstatement AND the audit expense for an extra year.

[Guest AZ Consultant]

Haven't crossed the 5500 bridge yet. My initial thought is to leave them alone. Plan is large enough to be audited with or without this person. It's our opinion he does not have the option of putting the money back in the plan since he signed forms to take the distribution and, therefore, once the plan acted upon them he was no longer a participant. Yep, one little thing can burn up a lot of time, that's for sure. What I really hate is that there is no definitely correct way to take care of the unusual that happens in life. I appreciate everyone's input!