qualified plan

On September 3, 2019, the IRS issued Revenue Ruling 2019-19, which discusses participants’ and beneficiaries’ inclusion of income and qualified retirement plans’ withholding and reporting obligations for uncashed distribution checks.  Although the Revenue Ruling describes only a qualified retirement plan under Code section 401(a), the same reasoning would most likely also apply to a Code section 403(b) plan.  Under the facts of this Revenue Ruling, a qualified retirement plan must make a distribution of $900 to a participant in 2019.  The participant receives the check from the plan but chooses not to cash it in 2019.  The IRS ruled that the participant’s failure to cash the check did not relieve her of the obligation to include the amount of the distribution in her gross income in 2019.  Similarly, the employer, as plan administrator, was obligated to withhold tax on the distribution that was required to be withheld under Code section 3405.  Finally, the employer was required to report the distribution amount on Form 1099‑R, and the participant’s failure to cash the distribution check did not affect this obligation.

These rulings are unsurprising based on existing law, particularly the doctrine of constructive receipt that is codified at Code section 451.  The IRS already ruled on a similar factual situation in Revenue Ruling 68-126, for example.  In that Revenue Ruling, a taxpayer could have received a retirement benefit check in one taxable year by appearing in person and claiming it but instead waited for the check to arrive in the mail in the following taxable year.  The IRS held that “the income is constructively received in the year preceding the year of actual receipt,” and that the retiree therefore had to include the amount of the check in income in the earlier year.  A rule that a participant could choose to delay inclusion in income of a distribution until a later year by simply failing to cash a distribution check in the year the plan issued it would also undermine the requirements to take required minimum distributions under Code section 401(a)(9).Continue Reading IRS Issues Ruling on Uncashed Distribution Checks from Qualified Plans

On July 21, the IRS announced that it is eliminating its current determination letter program for tax-qualified retirement plans. (IRS officials had been sending signals that this was coming for several months. It is now official.) Starting in 2017, the IRS will accept determination letter applications in only three circumstances:

  1. Initial qualification for a new plan. The IRS will still review any plan that has not previously received a determination letter.
  2. Plan termination. The IRS will still accept applications for a determination upon termination of a plan.
  3. Other limited circumstances to be determined by the Treasury Department and IRS. The Announcement says that Treasury and the IRS intend periodically to request public comments on what circumstances should be included in this category.

For plan sponsors, favorable IRS determination letters provide protection against disqualification for a “plan document failure”–for example, if the IRS later determines that a plan provision does not comply with the tax-qualification requirements or the IRS determines that a required provision is missing. Given the significant potential costs of a plan being disqualified, third parties often rely on determination letters to confirm that a plan is qualified. For example, buyers in corporate transactions, plans and IRAs accepting rollovers, and lenders often request to see copies of a plan’s favorable determination letter.Continue Reading Changes to IRS Determination Letter Program Raise Practical Questions