Uncashed checks - always a difficult issue

I'm having a hard time finding what I would call "clear" guidance on this, so just looking for opinions. This NOT a plan termination.

Participants terminate employment, get their 402(f) notice, and notification that if they don't respond within 30 days, they will receive a lump sum cash payment. (This would be for accounts less than $1,000.) Some of these accounts could be Roth. 

Some amount of time passes. Let's say at least until the following calendar year. I'm not at all sure proper steps have been taken (internet search, etc., etc. as outlined in DOL FAB 2014-01) to determine if these people qualify as "missing participants." "Missing participants" where the amount is less than $1,000 have a specific procedure in the plan language - basically, roll to an IRA or treat as a forfeiture.

So, these are "unresponsive" participants - they just have never cashed the the checks. Now the Plan Administrator decides to have these amounts rolled to an IRA. My question is twofold - first, is this allowable? Second, if so, or at least defensible, how to report? The distribution has already been reported, and if taxable, has been taxed.

Interested in what people perceive as a "best solution" where it appears that no solution is perfect. Thanks.

How about setting up the already-taxed funds into the same sort of "default investment IRA" except it's maintained as taxable funds by the custodian?  i think a place I worked at did that with a local bank - IRAs for over 1,000 as required by the plan, and taxable accounts for those under 1,000 who didn't cash their checks after trying to be forced out.

Thanks. Not sure if many vendors would do this?

5 minutes ago, Belgarath said:

Thanks. Not sure if many vendors would do this?

I think Millennial Trust Company will set up an after tax account for people.  But being sub $1,000 the fees are going to eat up the account.  

I would make sure the plan document allows for what you are doing.  I know the DOL doesn't like it but most documents I see still say if after a good search you forfeit the balance in the plan.  

It would be nice if the government gets its act together and they set it up so the PBGC could take DC money for lost participants.     Seems like that has been talked about for years.

At the moment - and I certainly could be convinced otherwise - I lean toward the following:

1. Do a free internet search only. Amounts are small - doesn't justify time and expense to go through additional steps.

2. If address is found, send them one more notification that if they don't respond in 30 days, it WILL be rolled over. Consider them a "missing participant" (but this doesn't solve the question of if/how to report).

3. If no address is found, consider a "missing participant" and proceed as in #2 above.

4. Alternatively, if considered a "missing participant" as in #'s 2 & 3, forfeit. This might be particularly desirable for REALLY small accounts. If the accounts ever have to be reestablished, reestablished contribution amount will be basis, and not taxed upon distribution.

Thoughts? Thanks in advance.

34 minutes ago, ESOP Guy said:

It would be nice if the government gets its act together and they set it up so the PBGC could take DC money for lost participants.     Seems like that has been talked about for years.

Agree!!! But when they do, they might make it so onerous to actually get the funds transferred that we'll be thoroughly disgusted with that option as well.

Plans can (and many do) allow for administrative procedures to rollover cash outs under $1,000, so I would definitely go that route where possible. That does not help for distributions already paid, reported as taxable but checks not cashed. Transferring to an after-tax bank account might work, but I would make sure that plan language supports. Also, distinguishing between missing and unresponsive is important and plan language should give you direction (at least for missing).

Maybe also sending letter saying the distribution has been reported to IRS as taxable and it doesn't matter whether or not check has been cashed might be the trick to change someone from unresponsive to responsive. Best practice to send such letter with the check?

Being asked for a solution to uncashed checks, particularly for small balances, is like being asked for directions for walking through a minefield - blindfolded.  Let's break it down. 

Is the participant "missing" or "unresponsive"?  By missing, what has been done to confirm the participant's contact information?  I suggest confirming the participant can be contacted before writing any checks.  Free internet searches are notoriously not helpful because they return too many unverified hits.  There is a low-cost, publicly available, no contract search service that charges $10 per search if you can provide the participant's ssn (be sure to follow the plan's PII policies), and claims something like a 99% success rate when you do.  They have been 100% successful when I have seen it used, and results were returned within 48 hours.  The $10 can be charged against the participant's account balance.  If you can confirm the participant's contact information and either speak to them or get a response to a mailed or emailed notification there is money available, then the participant is no longer missing.

If the attempts to locate the participant are unsuccessful, then the participant remains missing and the conundrum is what to do next.  Addressing missing participants is a related but different topic commented further below.

Let's move on to addressing the participant who is unresponsive.  By now, we should know how to contact them, so send them an election form explaining they can make a distribution election if they respond within 30 days (recommend providing an explicit response date).  Include an explanation of what happens if they do not respond which would be making a taxable distribution or moving to a default IRA depending upon the plan provisions and as directed by the Plan Administrator (recommend specifying applicable fees that will be charged). 

If the default is moving to a default IRA, make the move and consider the distribution as completed.

If the default is making a taxable distribution, write the check, withhold the appropriate taxes, and send a notice with an explanation of what happens if they do not cash the check timely (most plans seem to issue checks that are valid for 180 days from the date of the check).  The notice may say the check will be reissued, or the amount will be moved to an bank or similar account in the name of the participant (assuming you can find a financial institution amenable to hold this account).  Depending upon the plan's policies and procedures, the notice can explain whether the amount potentially could be contingently forfeited under the IRS rules, or the amount could be charged administrative fees that will diminish it over time, or the amount could be escheated to the state, or some other fate that conveys the message "cash it or lose it".   It also is worth disclosing that the amount will be reported on the Form 1099R, that the participant already paid taxes they should report on their personal tax return, and the IRS could ask about the distribution if the participant's personal tax return is reviewed or audited.

Circling back to a missing participant.  The PBGC said they will help, but only for terminating plans.  The IRS lets a plan make a "contingent forfeiture" (distinguished from a "forfeiture").  The DOL has been the most inconsistent in providing guidance on what to do with a missing participant.  Generally, the DOL seems to lean towards keeping the amounts in the plan until the plan terminates (which would then make it the PBGC's problem).  I have had a conversation with a senior DOL investigator who did not recognize contingent forfeitures and was adamantly against the practice.  Anecdotally, other DOL investigators have accepted contingent forfeitures if they are explicitly in the plan documents, significant efforts were made to locate the missing participant, and the policy has been applied uniformly.  Did I mention navigating a minefield?

DOL's karma is the SECURE 2.0 mandate for the DOL to create a national, online lost and found database no later than January 1, 2025.  I suspect that this will look like a flavor of the PBGC service and will require plan's to go through a series of steps and even a commercial search service before the DOL will accept a missing participant's balance.  We will see.  Can't wait for the comment period to open up.

Sigh... Thanks to all for the responses. This isn't a high-volume item, at least for us, but the hassle is all out of proportion to the number of cases.

The procedures for "lost or missing" participants, and setting up automatic rollover, etc. are reasonably clear. But the uncashed checks remain a problem for which there's no "good" solution that will apply across the board in all situations with all vendors. Que sera sera.

Paul, can you give me the name of the commercial search service you mentioned? That might be very helpful.

Thanks again to all!

Belgarath, the firm I mentioned is Employee Locator at... [drum roll]...  https://employeelocator.com/

On 5/1/2023 at 3:40 PM, Paul I said:

Depending upon the plan's policies and procedures, the notice can explain whether the amount potentially could be contingently forfeited under the IRS rules,

For small balances associated with missing participants (where someone has documented the steps undertaken to locate the individual), forfeiture (if permitted under the plan terms) is a very pragmatic option - subject to restoration should the participant resurface prior to plan termination. 

FWIW, we used the C3 restatements to change all our plans to IRA rollover on force-outs just so we wouldn't have to deal with this anymore.