Ferenczy Benefits Law Center | We are your ERISA solution
Atlanta, GA • 404.320.1100

Solutions in a Flash – Don’t Let Money Get Stuck in the Upside Down The Uncashed Check Dilemma

Solutions in a Flash – Don’t Let Money Get Stuck in the Upside Down The Uncashed Check Dilemma

Print Friendly, PDF & Email

Retirement Plan Correction Solution
Don’t Let Money Get Stuck in the Upside Down
The Uncashed Check Dilemma

By: Leah E. Dean, Esq.

Steve Harrington, the CEO of Scoops Ahoy Distribution Services, Inc. (“Scoops Ahoy”) and trustee for the Scoops Ahoy 401(k) Plan (the “Plan”), was reviewing the trust accounting for the Plan when he noticed several terminated participants’ checks were never cashed and were still included in plan assets. Concerned, he called Nancy Wheeler, the Plan’s third party administrator at Hawkins Pension Professionals, and explained the situation, “Nance, it’s like that time I got stuck in the Upside Down and thought I was trapped forever. I don’t want to be trapped as a fiduciary of this unclaimed money forever. What do I do?!” He told her he wanted to make sure the participants get their money, and also that he no longer wants to be responsible as a fiduciary for it. Nancy explained Steve’s options to help him resolve the issue and better prepare for this dilemma in the future.

IRS Uncashed Check Guidance

Nancy began by explaining to Steve how the Internal Revenue Service’s (“IRS”) response to uncashed checks differs from the Department of Labor’s (“DOL”). Generally, the IRS guidance concentrates on the taxes to be paid on distributions.  The IRS requires that taxes be withheld from participants’ distributions at the time the benefit is paid.  (There are some exceptions to this rule, most particularly in the case of a direct rollover from the plan to another plan or IRA.) Therefore, the Plan Administrator must withhold the income tax and report the distribution on Form 1099-R, which is the IRS’ reporting form for distributions from retirement plans.

In Revenue Ruling 2019-19, the IRS also clarified that a participant has taxable income when funds are distributed from a plan, even if the participant does not cash the check.

DOL Uncashed Check Guidance

The DOL’s Employee Benefits Security Administration (“EBSA”) is much more concerned with reuniting participants with their benefits dollars. EBSA published a “Best Practices for Pension Plans” guide for dealing with missing participants, including how to handle uncashed checks.

The DOL noted it considers the “absence of sound policies and procedures for handling uncashed checks” to be a red flag for plan mismanagement. Specifically, the DOL said that its examiners get concerned when they see a failure to maintain an accounting journal or other form of tracking the status of distributions, a substantial number of stale uncashed distribution checks, and a failure to reclaim stale uncashed check funds in distribution accounts.  As best practices for uncashed checks, the DOL specifically recommends in its guidance that the Plan Administrator flag undeliverable mail/email and uncashed checks for follow-up. Generally, the DOL recommends that accurate census data is maintained, effective communication strategies are implemented, missing participant searches are performed, and procedures and actions are appropriately documented.

Nancy explained the first step should always be to try to get and retain good contact information for all participants until they are paid out of the Plan.  Second, the Plan Administrator must look for missing or nonresponsive participants (for more information on missing participants and the DOL’s guidance, read our past Solution).

What Should Steve Do?

The key point that the DOL’s guidance gets across is that Steve needs to keep track of the status of participants for whom money is due from the Plan.  Therefore, Nancy suggests that Steve take the following specific steps:

  1. Establish a system for tracking distribution checks from issuance through cashing, with a follow-up alert when a check is not cashed within a reasonable time. It is common that the financial reporting prepared by the plan’s recordkeeper will show distributions leaving plan assets as of the date on which a check is issued to the participant.  In that circumstance, the Plan Administrator may not know whether there are any uncashed checks.  However, the DOL is clear that the Plan Administrator maintains a duty to know this information.  Therefore, the Plan Administrator should request, at least annually, a report from the recordkeeper as to any distribution checks that are uncashed, so that follow-up steps may be taken.
  2. Develop procedures for locating participants if distribution check correspondence comes back undeliverable. This is just one prong of keeping in touch with participants who still have rights under the plan.  Advising participants in exit interviews and in the summary plan description to keep the Plan Administrator aware of address changes is a good practice, as well.
  3. If a check is uncashed for a significant period, re-contact the participant and encourage him or her to cash the check. If necessary, stop payment on the original check and reissue.
  4. If the participant is “missing,” take action to locate him/her under IRS and DOL guidance.  (As noted above, our past Solution details the DOL’s guidance.)

The policy for dealing with missing participants and uncashed checks should be uniform. These procedures should be initiated automatically when the tracking system alerts Steve that the paths of the participant and the distribution have apparently not crossed.  Steve should attempt to contact any participants whose checks are uncashed, and, if they are missing, locate them.

Nancy also recommends that Steve’s Plan have a force-out provision in place, with automatic rollovers occurring for amounts in excess of $1,000.  This will enable him to force out any participants with balances of $5,000 or less, either by check or rolled over to an IRA in the participant’s name. Funds automatically rolled over to an IRA are no longer considered to be plan assets.  While Steve must prudently choose the financial institution that will hold the rollover IRA, he bears no further responsibility or liability for the funds after the rollover occurs. This solution ensures Steve runs into the uncashed check dilemma less frequently.

Steve may also want to consider adopting a provision in the Plan permitting conditional forfeiture of small amounts in the Plan in relation to unresponsive participants.  This would allow him to forfeit small amounts until such time as the participant reappears (when his or her account must be re-established).


Steve was absolutely right to be concerned about his participants and their money parting ways, and he needs to get to work to develop missing participant and uncashed check policies. This will save him grief in the future and ensure he is acting uniformly with all uncashed checks. He also should review the Plan and see if he currently has a force-out provision in place.

If you would like help developing an uncashed check policy or have any questions about uncashed checks, contact us. After all, we are your ERISA solution!

Print Friendly, PDF & Email
  • Posted by Ferenczy Benefits Law Center
  • On November 4, 2022