Author | Bonnie Treichel
While retirement plan balances of terminated participants above $7,000 can remain in the plan, small balances under $7,000, and specifically uncashed distribution checks for balances less than $1,000, remain a common administrative problem for retirement plan sponsors. Remember that uncashed check balances are considered plan assets until cashed, and plan fiduciaries must act prudently and solely in the interest of participants in the ultimate disposition of those funds. On July 16, 2025, the Internal Revenue Service (IRS) issued Revenue Ruling 2025-15i (“July 2025 Guidance”), which builds on prior IRS guidanceii, and helpfully addresses certain specific withholding and reporting obligations when distribution checks remain uncashed, are cancelled, or are subsequently reissued by plan sponsors.
Here’s What You Really Need to Know:
- As of 2024, so long as the plan document allows for it, a mandatory cash-out can occur without participant consent if the account balance is $7,000 or less and the participant has terminated employment.
- If the terminated participant’s balance is less than $1,000, so long as the plan document allows for it, the plan may issue a direct cash distribution (i.e., cut a check to the participant or beneficiary), which is generally subject to a 20% federal tax withholding unless the distribution is from a Roth accountiii, in which case the withholding does not apply.
- The July 2025 Guidance outlines several sample scenarios and provides the appropriate steps to take regarding federal tax withholding and 1099-R reporting of the $1,000 or less distribution. It also details the appropriate reporting steps when a second check is issued (if the first check is uncashed).
Let’s Dive In…
The IRS outlines the following scenario in the July 2025 Guidance:
Employer M is the plan administrator of Plan X; assume no Roth contributions are involved. Participant C has a balance in the plan of $800 but has not made a withholding election. Assume Participant C is a terminated participant. In 2024, Employer M made a distribution of Participant C’s benefit by withholding federal income tax in the amount required under the Internal Revenue Code (the “Code”) Section 3405, remitting that amount to the IRS, and mailing a check for the remainder to Participant C.
Participant C did not cash the check within six months of the date on the check, and Employer M cancelled the check.
How Does that Impact Reporting/Withholding?
It doesn’t. The July 2025 Guidance provides that no adjustment or refund is permitted when the first check remains uncashed, even if the check is cancelled, because the amount withheld and paid to the IRS was correct under the applicable withholding rules. The July 2025 Guidance further clarifies that Form 1099-R reporting requirements with respect to the first check do not change just because the check is cancelled, returned as undeliverable, or remains uncashed for any other reason.
What Happens Next
In this IRS example, Employer M mailed a second check in the amount of Participant C’s balance, net of the prior applicable withholding. The example also notes that there are no investment earnings adjustments to the account in the interim.
How Does that Impact Reporting/Withholding?
If, as in this example, the amount of the second check is not more than the first, the July 2025 Guidance provides that no (additional) federal income tax withholding is required, and no corresponding Form 1099-R reporting is required.
What if There Was an Investment Adjustment?
If the amount of the second check was $10 more than the first due to investment earnings, then that additional amount is subject to federal income tax withholding and Form 1099-R reporting.
A Note of Caution and Intersecting Guidance
The IRS notes that this guidance does not address:
- The appropriateness of mailing a check to an address on file that is believed to be incorrect;
- Instances where the second check is issued to someone other than the recipient of the first check; nor
- Situations where the account includes Roth or after-tax contributions.
Note that uncashed distribution checks from retirement plans can be a compliance red flag and can create fiduciary, tax, and escheatment issues if not handled properly. Uncashed checks and corresponding missing participants have been the subject of Department of Labor exams in the past. While the IRS guidance is helpful with regard to tax filing and notification, plan sponsors should have documented procedures in place not only for distributions, but for the prudent steps taken to both locate the recipient and to preserve those amounts in the interim. Consider reviewing other guidance related to uncashed checks and missing participants with your retirement plan consultant or advisor to address the overlapping regulatory scheme, including but not limited to:
- Department of Labor, Field Assistance Bulletin 2025-01 regarding Missing Participants and Beneficiaries – Pension Plans’ Transfer of Small Retirement Benefit Payments to State Unclaimed Property Funds
- Department of Labor, Missing Participants – Best Practice of Pension Plans, 2021
- IRS regarding Missing Participants and Beneficiaries and Required Minimum Distributions, 2017
- Pension Benefit Guaranty Corporation Regulation at 82 Fed. Reg. 60,800
Action Items for Plan Sponsors:
For plan sponsors, this overlapping framework of issues results in a set of action items including but not limited to considering:
- Work with your team of retirement plan experts to identify and understand the guidance and how it applies to your plan, including the new July 2025 Guidance.
- Establish a process, including roles and responsibilities, for how uncashed checks will be handled; at some point those funds may need to be escheated to the respective state unclaimed property funds.
- Hire service providers to assist with the process, including the third-party administrator (if applicable) and the recordkeeper.
- Document the process for handling and processing plan distributions, missing participants and uncashed checks.
I Internal Revenue Service, Revenue Ruling 2025-15, Withholding and Reporting With Respect to Uncashed Retirement Plan Distribution Checks (and Subsequent Checks).
ii Internal Revenue Service, Revenue Ruling 2019-19, Failure To Cash a Distribution Check From a Qualified Retirement Plan. Here, the IRS confirmed under the circumstances that the individual received and could cash the distribution check – that the individual’s failure to cash the distribution check does not alter the plan’s federal income tax withholding or Form 1099-R reporting obligations.
iii If the distribution is between $1,000 and $7,000, a mandatory cash out is still an option, but it must be to a qualified IRA, subject to certain requirements.
