Partic never cashed check is now missing--what to do?

[BG5150]

Participant requested a distribution from a terminated plan.  She actually came in and picked up the check. Withholding was properly taken and submitted.

Her check was never cashed. 

And she cannot be located.

(and the Trustee took it upon herself to stop the check)

What to do now?

Can they open up an IRA with after-tax basis with these funds?

 

[JOH]

When was the distribution taken? If it was taken in 2021, would it be possible to "undo" the distribution and just cancel it, including the withholding? If not, I don't think you can just re-deposit the funds back into the account as after-tax contribution because that is up to the client to report it as after-tax, you can't just ear mark that amount as "after-tax". At my previous company we had a suspense account that held all these types of funds. Eventually, the funds would get escheated.

[BG5150]

Problem is the plan is terminated, so the suspense account is of no value.

[ESOP Guy]

I can't cite anything but we have done what you suggest in your first comment.   We have set up an after-tax IRA at Millennium Trust Company for that kind of fact pattern. 

 

It is that or escheat it to the state which is grey at best also. 

[BG5150]

1 hour ago, ESOP Guy said:

It is that or escheat it to the state which is grey at best also. 

I'd be hesitant to do that so soon.

[JOH]

7 hours ago, ESOP Guy said:

I can't cite anything but we have done what you suggest in your first comment.   We have set up an after-tax IRA at Millennium Trust Company for that kind of fact pattern. 

There is no such thing as an "After-tax IRA", it's just an IRA that has after-tax contributions in it. It's the individual's responsibility to "ear-mark" as an after-tax contribution by filing Form 8606 with their 1040. The 5498 does not have a section to identify the contribution as an After-tax contribution. Also, there is a $50 penalty for failing to file Form 8606. If you're going to go that route and not going to cancel the 1099R, send it to a Roth IRA and request the transaction be reported as a Trustee to trustee conversion. That way, the 1099R wouldn't have to be corrected if it was issued with tax code 7 or 2, the funds would be tax free and the client would not have to file Form 8606. Also, the 5498 would reflect the Roth Conversion.

[ESOP Guy]

4 hours ago, JOH said:

There is no such thing as an "After-tax IRA", it's just an IRA that has after-tax contributions in it. It's the individual's responsibility to "ear-mark" as an after-tax contribution by filing Form 8606 with their 1040. The 5498 does not have a section to identify the contribution as an After-tax contribution. Also, there is a $50 penalty for failing to file Form 8606. If you're going to go that route and not going to cancel the 1099R, send it to a Roth IRA and request the transaction be reported as a Trustee to trustee conversion. That way, the 1099R wouldn't have to be corrected if it was issued with tax code 7 or 2, the funds would be tax free and the client would not have to file Form 8606. Also, the 5498 would reflect the Roth Conversion.

By after tax I mean we reported the IRA had a basis so the person didn't pay taxes twice on the money.

Once again I don't claim there is clear guidance.  The problem is the government hasn't given us any guidance.  So we did something that seems fair, they don't get taxed twice, but allows the plan to end which is also fair. 

To me until the IRS or DOL gives guidance to a situation that is rather common they can live with the industry's solutions. 

For them to demand we follow the law and then not give us a legal way to solve a common problem is not a rational expectation on their part. 

[BG5150]

I think putting the money into an IRA as basis is the best way to do it.

Side note:  the lady was found.  When they said she "went to Uruguay," we thought she went back home and finding her would be difficult.  But she was only visiting and came back.  But this was a good academic exercise and now we have a good place to start if this ever happens again.