Participants and beneficiaries are sometimes slow to cash qualified retirement plan distribution checks, especially when the checks are relatively small. This may result in the check being cashed in a year after the year the check was received. Sometimes it is not cashed at all.
In this situation, a common question from plan administrators is whether this changes the year of distribution for purposes of the Form 1099-R or the plan’s requirement to withhold from the distribution, or means that the participant or beneficiary is not required to include the distribution in taxable income for the year the check was received. This question may arise because the recipient of the distribution is arguing for alternate treatment – for example, that the payment should be taxed in the year the check is cashed. The recipient may have cashed the check after filing the tax return for the year, didn’t consider that payment or the 1099-R in completing the return, and is trying to avoid an amended tax return. Plan administrators tell participants and beneficiaries that there is nothing they can do, because their lawyers or tax advisors say that the tax treatment is fixed.
In Revenue Ruling 2019-19, the IRS has concisely addressed these questions, confirming the bad news that tax advisors and lawyers have regularly delivered. No matter what the participant or beneficiary does with the check, once received,
- the distribution is included in the individual’s taxable income;
- the distribution is reported on a Form 1099-R; and
- withholding on the distribution, if required, applies.
Although the IRS clearly concluded that when or whether the recipient cashes the check is not relevant in answering these questions, it did not address some of the tricky questions that arise when distribution checks are issued close to or at year-end.