In Rev. Rul. 2019-19, which was issued on August 14, the Internal Revenue Service (IRS) took another small step in its undertaking to address tax issues raised by missing or unresponsive retirement plan participants. The ruling posits a participant who receives, but neither cashes nor rolls over, a distribution check. Because Internal Revenue Code Section 402(a) provides that any amount actually distributed from a qualified retirement plan is taxed under Section 72 in the year distributed (subject to the rollover rules), the ruling holds that the participant is taxed on the distribution check in the year she receives it, even if she does not cash it. The ruling goes on to provide that her failure to cash the check has no effect on the employer’s responsibility to withhold income tax on or tax report the distribution amount.

Eversheds Sutherland Observations

• Rul. 2019-19 joins Rev. Rul. 2018-17, dealing with funds escheated from IRAs, as the front end of a series of guidance planned by the IRS and Treasury to deal with the particular issues created by missing or unresponsive plan participants.
• There is no new news in this ruling for well-advised taxpayers. The IRS had, however, reportedly received inquiries hoping for a different outcome if the participant did not cash or even returned the check, often in connection with a divorce or garnishment or other similar circumstances, and judged that a ruling on these facts would be useful in that respect.
• While the ruling no doubt correctly reads Section 402(a), the statute has always created counter-intuitive results for distributions made at or near the end of the tax year that cannot be deposited until the following year. It would be helpful for the IRS, as an exercise of administrative grace or otherwise, to provide a practical answer for that situation. The “actual distribution” language in Section 402(a) effectively repeals constructive receipt principles for qualified plans, and some small latitude for year-end distributions would hardly run afoul of that Congressional purpose (even if some taxpayers might potentially use that latitude for gaming the system).
• Rul. 2019-19 addresses the situation where the distribution check is in fact “received” by the participant. It does not reach the more challenging set of related tax recognition, reporting and withholding issues that arise when plan disbursements are transmitted but not “actually” received due to death or an incorrect address. In fact, employers and recordkeepers are rarely able to distinguish these situations from the facts in Rev. Rul. 2019-19 unless and until the check is returned as undeliverable, which can result in tax reporting issues. And any subsequent escheatment to the state of an unclaimed distribution raises its own interpretive and administrative complexities that also merit direction from the IRS.
• In any event, coordinated guidance from the IRS, DOL and PBGC on missing participant or escheat fact patterns would, of course, be optimal.

[View source.]