Retirement plan sponsors are often faced with a unique, but persistent challenge, when participants fail to cash or deposit distribution checks. Whether the participant has moved, misplaced their check, or simply delays acting, uncashed checks can become problematic. From a tax compliance standpoint, however, the IRS’s guidance is clear, and plan sponsors must be careful. Taxation Should NOT Wait For a Cashed Check: In Revenue Ruling 2019-19, the IRS clarified that a retirement plan distribution is considered made, and is therefore taxable, when a retirement plan participant receives a check the participant can cash, even if the participant never does so. This means the participant is still subject to income tax, as well as possible early distribution penalties, in the year the check is received, and the sponsor must report the distribution on Form 1099-R for that year. In short, uncashed checks do not defer taxation.
Withholding Rules Still Apply: Plan sponsors must withhold the appropriate amount of taxes at the time the check is issued. For most eligible rollover distributions that are not directly rolled over, this means the mandatory 20% federal income tax withholding must be assessed. Other non-periodic payments generally are subject to 10% withholding, unless the participant affirmatively elects out. A check may remain uncashed by the participant, but the withheld taxes must still be remitted to the IRS on the participant’s behalf. The participant may claim the withheld amount as a credit when filing their tax return, but the gross distribution will remain taxable. In Revenue Ruling 2025-15, the IRS indicated that if a first check was properly reported and withheld upon but remained uncashed, the plan cannot recover or adjust the taxes already remitted. If the plan later issues a second check for the same amount or less, no additional withholding is required. If the second check is greater (for example, because of investment earnings), withhold and report only the incremental amount.
Compliance Risks for Plan Sponsors: Sponsors who fail to follow the tax reporting and withholding rules may become subject to IRS scrutiny. Common pitfalls to avoid include, not issuing a Form 1099-R for uncashed checks, mishandling withholding deposits (especially if checks are later voided or reissued), and improper escheatment to state unclaimed property funds without addressing federal tax obligations. Keep in mind that escheating an uncashed distribution to an unclaimed property office does not relieve sponsors of their federal tax withholding obligations. To avoid potential compliance issues, plan sponsors should try to maintain accurate participant contact information, follow the IRS’s reporting and withholding rules, develop a written and accessible policy for uncashed checks that complies with federal tax requirements and state unclaimed property laws, and work with recordkeepers and custodians to ensure procedures align with IRS guidance. Key Takeaway: Uncashed retirement plan checks may seem like a small administrative nuisance but
mishandling them could trigger costly compliance issues. As plan sponsors, understand that once a distribution check is issued, the IRS treats it as taxable, reportable, and subject to withholding, whether or not the participant cashes or deposits it. When you establish clear procedures and remain aligned with federal and state requirements, you reduce risk while helping participants understand the importance of handling their distributions promptly and properly.
