Stale Distribution Check

A terminated participant was provided a distribution check for $150 in December 2016.  In  2017, the investment company determined that the check was never cashed and has reversed the transaction and is including the funds in the plan's assets.  A new check was written in June to the participant and he is cashing the check.

For 5500 reporting, at 12/31/16 should the stale check be included in the ending asset balance?  Also, should the 2016 1099R for the participant be amended to reflect $0 distribution and a new 1099R prepared for 2017 showing the payment?

I don't think the participant's failure to timely cash the check changes the time frame in which it is taxable - if I get a distribution check in December 2016 but wait to cash it in February 2017 that doesn't make it taxable in 2017. As this was not a missing participant, administrative error, wrong address issue, but apparently simple inaction by the participant, I would continue to treat this as a 2016 distribution - at least that is the position that I believe IRS would take, unless it is a known fact the participant never received the first check (but not sure if that really matters).

However, I know the DOL would say those are still plan assets until the check is ultimately cashed. I don't know if that position extends to 5500 reporting, or how it reconciles with the IRS position, or if it merely relates to the fiduciary responsibility for ensuring the participant receives their payment.

What is impressive to me here is that the financial institution actually cancelled stale check and re-issued in 6-month time frame. Lots of trustees/custodians out there are more lax in that area.

Ok, not the rules but here is my take on the 5500.  Do whatever you want it is immaterial to spend this much time thinking about it. 

What I would do is not include it in the ending assets as it was paid and move on.  But if the CPA doing the audit (assuming it is even an audited plan) said put it in the ending assets I would give them what they want without any additional thought.  Too small of an amount to care about.  I have never seen an IRS or DOL audit of a 5500 that has ever looked at the assets of a plan hard enough to get into this issue. 

2 hours ago, ESOP Guy said:

Ok, not the rules but here is my take on the 5500.  Do whatever you want it is immaterial to spend this much time thinking about it. 

I just broke my 'like' button hitting it so hard :-) 

Agree about the immateriality for sure, but I've seen similar issues on multiple $4,000-$5,000 checks on larger plans so the discussion about proper tax treatment and 5500 reporting is worth having - the right answer applies to all situations, large and small, does it not?

Given that no one can point to clear guidance raises the question if a "right" answer is knowable or even exits. 

Note I only commented on the 5500 treatment. 

I think your answer on the tax treatment was spot on.  By all accounts this person had Constructive Receipt of the check so it was taxable in year of issue.  That is a very clear rule in tax law and easy to follow in many cases. 

On the other hand the people who wrote the instructions for the Form 5500 clearly never even bothered to think of such real life issues as asked about here.  They don't even bother to read Benefitslink.com on a regular basis to see ways they could issue better guidance as I am willing to bet if someone did a search of this website one would find dozens of instances this exact question has come up.  (My guess is some of them have me telling the person it is immaterial do what seems reasonable also.)

That has been my view on many issues in this field.  For all the rules it is amazing how many real life ideas never bother to get addressed.  Still waiting for guidance on what "de minimus" means for purposes of 414(s) testing since I first learned the test in the early '90s. 

This website is a testament of what I am talking about.  There are people who come here who have decades of experience and yet regularly they find situations that long debates happen over what is the right answer with no clear conclusion.

I stand by my basic view too many people spend too much time worrying about the minutiae of the Form 5500 when it is clear neither the IRS nor the DOL care.  I can't tell you how many audits I have helped a client with and never once have they asked the question, "how are checks issues but not cashed shown on the Form 5500?"  If it is material I will give it some thought by asking the CPA if they have any thoughts but a $150 check sorry it has taken me longer to reply to you then I will every think about it. 

Absolutely agree & if an auditor actually asked about it I would probably laugh at them

Just a note that taxation of qualified plan benefits since ERTA in 1981 has been based solely on an actual distribution of benefits.  Don't think that changes the taxation conclusion here though.  

Re the 5500, I would follow the cash, even if were larger amount. If the trustee restored the amount to the participant's plan account, then it's a plan asset, although maybe now (or maybe not) an after-tax amount.

Constructive receipt is a question of fact, and the question as originally posed does not provide all necessary facts. The basic idea is, did the taxpayer "turn his/her back on income." If the individual received the check and, hard to imagine, said "Heck, I'm not going to cash this so the $150 will be taxable next year," then sure, constructive receipt in 2016. Or if carelessly left the unopened envelope on kitchen counter, knowing it was a small check, maybe constructive receipt. But if moved, never got the check, ex-wife hid it, whatever, no constructive receipt.

In theory, whether a 2016 or 2017 1099-R is correct is determined by whether he did (2016) or did not (2017) have constructive receipt.