Uncashed Checks Following Plan Termination

Would uncashed checks still be considered assets of the plan if they remained uncashed into a new plan year?

For example, 401(k) plan terminates on September 15, 2018. All checks are written and other distributions made by September 14, 2019. Someone doesn't cash their check until January 2020. 

Does the plan need a 2020 5500 and audit?

Does the uncashed check mean all assets are not out of the plan within 12 months and the original termination date of September 14, 2018, is no longer valid?

5 hours ago, EBECatty said:

Would uncashed checks still be considered assets of the plan if they remained uncashed into a new plan year?

For example, 401(k) plan terminates on September 15, 2018. All checks are written and other distributions made by September 14, 2019. Someone doesn't cash their check until January 2020. 

Does the plan need a 2020 5500 and audit?

Does the uncashed check mean all assets are not out of the plan within 12 months and the original termination date of September 14, 2018, is no longer valid?

You are mixing and matching a lot of ideas here in my mind:

1) It is my understanding the most conservative approach is to say the trust isn't gone until all the checks are cashed.  I know people who file the final 5500 showing an asset and a payable that net to zero.   

2) To me the audit question is more interesting.  If it was just one check outstanding and you say that person is a participant still than isn't the plan's opening body count well below 100 on 1/1/2020?   So there is no need for an audit for 2020 in my mind.   Now if there were a hundred uncashed checks.....

I will let the lawyers talk about the 1 year thing more authoritatively.   I have never seen a plan get in trouble for going beyond 1 year if it is actually working on getting everyone paid as a matter of observation.  

Interesting, thanks. Agree on the audit--my fingers got out in front of my brain.

Out of curiosity, have you ever had a 12+ month situation where the plan was working diligently on distributions and the IRS affirmatively said it was okay (as opposed to it happening without IRS knowledge and no one ever raising it as a problem)?

1 hour ago, ESOP Guy said:

1) It is my understanding the most conservative approach is to say the trust isn't gone until all the checks are cashed.  I know people who file the final 5500 showing an asset and a payable that net to zero.  

I am positively in the camp that would not just show the checks as payables but as paid - no assets, no liabilities.

That pretty much answers the other Qs but an additional comment - failure to distribute within 12 months is not necessarily problematic.  It just means you have to keep filing, which means if you cut the checks after 9/15/19 but before 12/31, you're filing a 2019 return which you would be doing anyway.  And you have to maintain the document - which might or might not mean preparing a required amendment; I can't think of anything that would have to be done in October 2019 that wouldn't have to be done in September.

Also remember the IRS recently reiterated its position that the timing of a participant's negotiation of a check does not impact the timing of its tax treatment. So for IRS purposes you have a 2019 taxable distribution. I find it hard to believe then, that the uncashed/delayed cashed check is still a plan asset in 2019. If it was lost, returned as undeliverable, etc. such that the participant never received it, then that may be a different story and the DOL position is likely you still have assets.

Any participants who think delaying their check cashing into next year will also delay tax liability should be reminded/educated otherwise.

Thank you both. I thought the recent IRS guidance would be helpful as well.

Bird, the only context where I've encountered this and I thought it made a difference was a plan termination before a stock purchase. If the plan is not considered "terminated" due to the 12-month distribution rule, my understanding is it could no longer distribute elective deferrals under the successor plan rule and would have to be merged into the buyer's plan. At least that's the general rule regarding stock acquisitions and successor plan rule; not sure the outcome would be any different if the plan termination was post-closing by design or inadvertently as a result of slow distributions.

I don't know the answer, but if the checks are uncashed, the money is still in a bank account, right? Historically, I have put in plan documents, or resolutions for plan termination, that uncashed checks would at some point revert to employer and be held by it on behalf of the participant, and if at some point the participant reemerged and asked for his/her funds, employer would pay it without interest. Idea was that plan would no longer have an account within, say, 6 months of termination. But as long as there is a bank account in the plan's name, how can you say there are no plan assets?

5 hours ago, ESOP Guy said:

2) To me the audit question is more interesting.  If it was just one check outstanding and you say that person is a participant still than isn't the plan's opening body count well below 100 on 1/1/2020?   So there is no need for an audit for 2020 in my mind.   Now if there were a hundred uncashed checks.....

That sounds correct.  Note that the test for the 2019 audit is based on the B-O-Y participant count.

17 hours ago, EBECatty said:

Bird, the only context where I've encountered this and I thought it made a difference was a plan termination before a stock purchase. If the plan is not considered "terminated" due to the 12-month distribution rule, my understanding is it could no longer distribute elective deferrals under the successor plan rule and would have to be merged into the buyer's plan. At least that's the general rule regarding stock acquisitions and successor plan rule; not sure the outcome would be any different if the plan termination was post-closing by design or inadvertently as a result of slow distributions.

I have little experience in that but it sounds like someone's conservative approach, not something you would find in the regs.  Certainly the part about having to merge into the buyer's plan - there are transition rules and none of them dictate merging.

16 hours ago, Luke Bailey said:

I don't know the answer, but if the checks are uncashed, the money is still in a bank account, right? Historically, I have put in plan documents, or resolutions for plan termination, that uncashed checks would at some point revert to employer and be held by it on behalf of the participant, and if at some point the participant reemerged and asked for his/her funds, employer would pay it without interest. Idea was that plan would no longer have an account within, say, 6 months of termination. But as long as there is a bank account in the plan's name, how can you say there are no plan assets?

We don't know the way the investments are set up.  If it's on a platform, then the "plan" will definitely show the assets leaving - they are in the general assets of the recordkeeper (and might return to the plan if uncashed for long enough! - but that's not what we're talking about).  If it's not on a platform, and the plan has its own checking account (and I assume that is the case here), yes the bank records will show assets as of the last day of the year but the register will show a zero balance.  I don't think there is any doubt whatsoever that there are no assets in the plan.  As CuseFan notes, the IRS has clearly stated that taxation is based on the year checks are written, and I believe, firmly, that that logic follows through to all reporting.  No way would I waste my time and/or my client's money on preparing a return for a year after all assets were distributed by check just because a check wasn't cashed.  

39 minutes ago, Bird said:

I have little experience in that but it sounds like someone's conservative approach, not something you would find in the regs.  Certainly the part about having to merge into the buyer's plan - there are transition rules and none of them dictate merging.

The concern is not in the 410(b) transition rules, but rather the successor plan rule. With some exceptions, you can't distribute elective deferrals from a terminated plan if any member of the sponsor's controlled group has another 401(k) plan. If the stock purchase closes, the sponsor and the new parent company are in the same controlled group. If the parent has a 401(k) plan, the sponsor cannot terminate its 401(k) after closing and distribute elective deferrals--the plans would have to be maintained separately or merged. This is why plans are typically terminated effective the day before a stock acquisition.

If the sponsor terminated the plan before closing, but took longer than 12 months to make distributions, under Rev. Rul. 89-87 the IRS could argue distributions were not made as soon as administratively feasible. Unless you had specific facts to rebut that presumption, the original (pre-closing) plan termination date would no longer be valid and the plan would have a post-closing termination date, bringing you (in my opinion) back to the successor plan issue.

2 hours ago, EBECatty said:

The concern is not in the 410(b) transition rules, but rather the successor plan rule.

I get it; the statement that the plans had to be merged seemed a little strong.

Just a thought; if you file the 5500 series as final and that shows total assets and a liability so that net assets are zero, an edit test will be flagged telling you that the filing has not met the criteria for a final filing.

You might want to check with a trust company that facilitates retirement plan distributions in respect of missing or non-responding participants. Two that come to mind are Penchecks and Millennium Trust. I expect they have experience with this situation and may have a solution such as creating rollover IRAs and/or bank accounts in the participants' names.