Uncashed Checks - All to traditional IRAs?

[justanotheradmin]

A financial company that shall remained unnamed has recently notified it's plan sponsors that it is changing how it handles uncashed distribution checks. Any checks uncashed after 365 days will have the money moved to an IRA. 

When we asked for clarification the response was that nothing from the tax reporting on the original distribution would be changed. Depending on the type of original distribution, the deposit into the IRA would either be considered a contribution, or a rollover. It would be up to the participant to make sure it was reflected correctly on their tax return, including amending prior returns if necessary. 

I can think of a whole host of ideas why this is a bad idea, and was wondering what other people think. 

The financial company is not making any distinction between under $5,000 force out distributions, affirmatively elected distributions, rollovers, cash outs to participants, Roth money, non Roth money etc. What if the amount exceeds the person's IRA contribution limit? 

I have not seen other companies handle uncashed checks this particular way before. But maybe there are others who do it the same way? 

Am I in the minority in thinking there are several other similar - but much better - ways to handle this? 

[Larry Starr]

1 hour ago, justanotheradmin said:

A financial company that shall remained unnamed has recently notified it's plan sponsors that it is changing how it handles uncashed distribution checks. Any checks uncashed after 365 days will have the money moved to an IRA. 

When we asked for clarification the response was that nothing from the tax reporting on the original distribution would be changed. Depending on the type of original distribution, the deposit into the IRA would either be considered a contribution, or a rollover. It would be up to the participant to make sure it was reflected correctly on their tax return, including amending prior returns if necessary. 

I can think of a whole host of ideas why this is a bad idea, and was wondering what other people think. 

The financial company is not making any distinction between under $5,000 force out distributions, affirmatively elected distributions, rollovers, cash outs to participants, Roth money, non Roth money etc. What if the amount exceeds the person's IRA contribution limit? 

I have not seen other companies handle uncashed checks this particular way before. But maybe there are others who do it the same way? 

Am I in the minority in thinking there are several other similar - but much better - ways to handle this? 

Start by telling us who this unnamed financial institution is.  And explain how they have the ability to even do that?  It's a plan sponsor decision to move money; you need to explain the relationship that even allows the "unnamed" institution to do this?  From there we start pulling them apart..... ?

 

[justanotheradmin]

I hesitate to name the company because the last time I complained about a specific company there were some issues with my post. Nor do I want this to turn into a 'let's all bash XYZ custodian/ recordkeeper'. During the regular course of things I haven't encountered too many issues with this company. Just this particular misguided attempt to get uncashed checks off their books. 

As to how they are allowed to do this - I asked the same question, and asked them to provide citations. I have not heard back from my latest e-mail. 

[Larry Starr]

14 minutes ago, justanotheradmin said:

I hesitate to name the company because the last time I complained about a specific company there were some issues with my post. Nor do I want this to turn into a 'let's all bash XYZ custodian/ recordkeeper'. During the regular course of things I haven't encountered too many issues with this company. Just this particular misguided attempt to get uncashed checks off their books. 

As to how they are allowed to do this - I asked the same question, and asked them to provide citations. I have not heard back from my latest e-mail. 

I would love to see the notification that they sent explaining this; could you post (redact if you must, but I still think you should feel free to say who it is since they have taken a public position on this).

[justanotheradmin]

Here is the initial communication, which doesn't say much. I suppose to be fair they are allowing sponsors to opt out of this approach. The additional clarification from XYZ  went into more detail on the 1099-Rs, rollover treatment and IRA contribution treatment etc, which I outlined in my original post. 

 

"Dear TPA ,

We are writing to let you know that one or more of your Plan Sponsors will be receiving a letter from XYZ the week of November 11th regarding uncashed checks.  This letter is to inform Plan Sponsors of action we will be taking on checks that have been outstanding for 365 days or more.  Our plan is to transfer those funds to an outside company, to establish an IRA for the benefit of each respective individual.

If a Plan Sponsor is in agreement with this process, no action is necessary.  Alternatively, if they wish to provide more current participant addresses, they may complete the Notice of Direction (included with their letter) and return it to us no later than 60 days from the date of the notice. If the check remains uncashed after mailing to the updated address provided by the Plan Sponsor, XYZ will need direction from the Plan Sponsor how to process the check.

If a Plan Sponsor’s plan document allows for disposition of such assets to the plan’s existing Forfeiture or Trustee-level Account, the Sponsor may use the Form provided with this email to direct XYZ accordingly. 

As a reminder, you may access our Uncashed Checks Report for your plans on XYZ Website within the “Reports” section.  For a list of your impacted plans, please contact the XYZ Team.

Please let us know if you have any questions. "

[RatherBeGolfing]

I see no harm in naming the company since they have openly communicated this.  I don't have all the details, but there is more to it than just sending the funds to an IRA. I have also not seen the follow up that OP refernce, only the initial communication to  TPAs and Plan Sponsors.

Voya Financial is working with Millenium Trust on uncashed checks that have been outstanding for more than 365 days.  The letter to the plan sponsors first reference checks that are returned as undeliverable, but then the terminology switches to uncashed checks.  Either way, Voya's default method of dealing with these checks is to transfer them to MT.  MT will then place them in an IRA and attempt to contact the "account holder" with instructions on how to receive payment from MT.

The plan sponsor can tell Voya to not transfer to MT and make another attempt to an updated address, or deposit the funds to the plan's forfeiture account.

MT is not the only provider to offer an uncashed check solution, Penchecks has a similar solution using either Taxable Savings Account or a default IRA.  Im sure there are other players as well.

[Bird]

So someone got a cash distribution, paid tax on it, but didn't cash the check...and now the (net) amount goes to an IRA?  If that's the case, I don't see how that is "ok."

[ESOP Guy]

3 hours ago, Bird said:

So someone got a cash distribution, paid tax on it, but didn't cash the check...and now the (net) amount goes to an IRA?  If that's the case, I don't see how that is "ok."

I know Millennium Trust is willing to set up an IRA in this case with a basis for that fact pattern. 

I have concerns a record keeper is declaring policy instead of the Plan Administrator but I think there are solutions to many, if not all, of the practical issues to the move.  

[justanotheradmin]

13 hours ago, RatherBeGolfing said:

 I have also not seen the follow up that OP refernce, only the initial communication to  TPAs and Plan Sponsors.

After receiving the TPA notification I had asked some follow-up questions, and it was in response to those questions that the rest was explained in an email. I don't know that they will provide that additional information unless asked. So I encourage all of you to ask. I have not seen any issues with MT or Penchecks when used by other sponsors, so I don't think the issue is them. There was zero mention of a taxable savings account in the clarification I received (whereas Penchecks is usually happy to explain that option when asked about uncashed check services).

Unless the sponsor opts out, the communication from Voya made it clear uncashed checks would be going to an IRA.  

The e-mail response I received even mentions that if the money is an excess contribution to the IRA, the customer is subject to a 6% penalty each year it remains in the IRA. So they clearly know this will create issues for the participants. I imagine this particular possibility is the reason Penchecks has their taxable savings account option. 

My concerns are two fold -
1. Will this create issues for the plans / sponsors, particularly in that the terms of the document are not followed (such as an affirmative election for a cash out that instead ends up in an IRA), and
2. What issues this may create for the participant. 

 

I just get the impression that this wasn't well thought out. 

For example - I asked about Roth IRAs (because some portion of the uncashed checks are Roth money), and the answer to that was the IRAs may record the money as pre tax or post tax, but that the IRAs themselves aren't recorded as pre tax or post tax. So it sounds like the Roth uncashed check money will go to a traditional IRA, but be recorded as post-tax money. Which for the record is not the same as going to a Roth IRA. Not to mention Roth 401(k) can't be rolled over to a traditional IRA, so it would count as an after-tax contribution to the IRA (and I presume lose it's status as Roth money). 

[justanotheradmin]

It may be helpful to know that MT's uncashed check literature only mentions account balances under $5,000 unless the plan is terminating. And it makes zero mention of Roth. I suppose I don't actually know what MT does with Roth account balances when part of a force out distribution. 

I too am concerned about Voya setting policy for the plans.