How to solve your uncashed checks concerns
Many mandatory distribution checks to retirement plan participants remain uncashed, creating problems for plan sponsors. We look at the uncashed checks issue and why automatic rollover IRAs could be the best solution.
Causes of uncashed checks
Most uncashed retirement distribution checks are the result of plan participants not realizing they have money owed to them. It's hard for plan sponsors and service providers to keep track of participant records and addresses, especially when people are switching jobs or unaware they have a retirement account balance.
More people switching jobs
According to the Bureau of Labor Statistics, as of January 2022, the median job tenure of younger workers (ages 25 to 34) was three times lower than workers ages 55 to 64. Younger workers’ tenure was only 2.8 years. And this younger age group makes up the largest portion of the workforce, according to the U.S. Census Bureau.
More auto enrollment retirement plans
Many employers now automatically enroll their employees in retirement benefit programs. Auto enrollment has dramatically increased participation rates, but it has also led to a rise in accounts left behind and uncashed checks.
Plan sponsors can send a check immediately to a former employee if their retirement plan account balance is less than $1,000. Because of automatic enrollment, the number of these small-balance accounts has increased, leading to an increase in uncashed distribution checks.
Problems associated with uncashed 401(k) distribution checks
Uncashed checks can create multiple issues.
Need to continue fiduciary oversight
The Department of Labor (DOL) has repeatedly indicated that uncashed checks have implications for plan fiduciaries. For example, many plan service providers retain “float” on amounts held in a payment account when a participant check is cut for a distribution. The DOL expects plan fiduciaries to monitor this additional float received by service provider to ensure total compensation to the service provider is reasonable and to avoid any prohibited transactions.
If the uncashed check is canceled, and the assets are returned to the plan, a new account must be created, which increases plan costs.
Increased DOL enforcement activity
During regular audits, the DOL’s regional offices now question plan sponsors about the efforts sponsors have made to find and contact missing participants.
Forfeiture may not be an option
Some plan documents allow a missing participant or beneficiary plan account to be forfeited, subject to reinstatement if the account owner is located. The problem is, once an account is closed, the plan's recordkeeper doesn't keep track of the account information. The plan sponsor’s HR department has to make sure the forfeited account details don't get lost.
Escheatment may not be an option
Unlike other financial accounts, retirement plans governed by ERISA may not be able to escheat uncashed checks to a state.
Reporting and Withholding Issues
Plan sponsors are often unsure how to comply with tax rules on withholding and reporting for uncashed 401(k) distribution checks. There's no guidance from the Internal Revenue Service (IRS) on how to handle these issues, making it even harder to manage.
The distribution is also typically reported as a taxable distribution (on Form 1099-R). If the check is uncashed, the plan needs to decide whether to modify the prior Form 1099-R reporting, especially if assets are returned to the plan after an extended period of time.
Automatic Rollover IRAs may be the best solution
Participants who have uncashed checks are considered missing or non-responsive. Funds representing participant retirement plan balances of $5,000 or less ($7,000 or less after December 31, 2023) can be placed into an automatic rollover IRA with a custodian like Millennium Trust.
Note: automatic rollover IRAs can also be used for larger account balances if the distribution is part of a terminating defined contribution plan.
The custodian will open an IRA in the name of the plan participant and place the funds in an investment, as directed by the plan sponsor, intended to minimize risk, preserve principal, maintain liquidity and give a reasonable rate of return. This initial investment may include interest-bearing demand accounts, certificates of deposit, and stable-value products.
Most IRA custodians will take multiple steps to locate the participant to reunite them with their newly created IRA. They will use a thorough search service, leveraging extensive databases to help locate missing participants.
Preventing uncashed checks
While automatic rollover IRAs can be an effective solution for existing uncashed checks issues, plan sponsors can take a few key steps to help prevent them in the first place, including:
- Encouraging quarterly updates of employees’ addresses and contact information.
- Keeping data accurate and complete during corporate transactions or changes in recordkeepers.
- Including information about retirement plan options in the off-boarding process.
- Obtaining a personal email address or cell phone number during the off-boarding process.
By taking these preventative steps, plan sponsors may be able to limit the number of uncashed checks outstanding from their plan.
Looking to solve your uncashed checks concerns today? Millennium Trust can help.