Dealing with Uncashed Distribution Checks and Missing Participants

It is estimated that uncashed checks account for billions of dollars,
representing a fortune of uncollected funds belonging to plan participants or
beneficiaries that they are not able to use and also represent serious issues
for fiduciaries.

Uncashed distribution checks occur when retirement plan participants fail to
cash or deposit a distribution check from their defined contribution plan, for a
variety of reasons, including:

  • An incorrect mailing address;
  • A lost or misplaced physical check;
  • A distribution check that was not
    anticipated (e.g., mandatory cash out of account balances of $1,000 or less); or
  • As the result of inaction on the part
    of the participant.

The uncashed checks issue is a problem that has gained the attention of the
Department of Labor (DOL) and Internal Revenue Service (IRS). The DOL estimates
that each year $15 million in retirement plan distribution checks go unclaimed
because plan participants, or their beneficiaries, have failed to cash
distribution checks. And it’s rapidly becoming a material issue for retirement

This article will focus on defined contribution plans, although defined
benefit plans have issues as well, especially since benefits may not be payable
until normal retirement age, which could be well after participants terminate
employment, allowing lots of time for them to go missing.

Uncashed Checks are Plan Assets

Plan sponsors retain fiduciary responsibility of the funds represented by
uncashed checks. Therefore, it is the fiduciary’s responsibility to work with
their service providers and attempt to locate these participants in order to get
them to take action.

The failure to take steps to locate and pay terminated participants can be
considered a breach of fiduciary duty, potentially resulting in personal
liability to plan fiduciaries.

What Should Plan Sponsors Do?

Unfortunately, there is no clear guidance from the IRS or DOL regarding how
to administer these checks. Until guidance is issued by regulators, plan
sponsors should take a best-practices approach while working with ERISA
attorneys and service providers to develop policies and processes for managing
uncashed checks, outlining those processes in plan documents (along with
recording the rationale behind the choices made) and making sure the processes
are implemented properly. At a minimum, plan documents or written procedures
should describe:

  • The steps that will be taken to locate
    lost or non-responsive participants;
  • The time frames for banks or the plan
    administrator to report uncashed checks to the plan; and
  • How the funds from uncashed checks will
    be handled if the participant cannot be located.

Searching for Missing Participants

Plan fiduciaries must make a reasonable effort to locate missing participants
and should keep accurate records of all efforts to locate them. The DOL has
provided steps for finding participants for terminating defined contribution
plans. This guidance can be useful for ongoing plans as well.

Required Steps

The minimum steps a fiduciary must take to find lost participants are:

Send a notice by certified mail: This method allows the sender proof of
mailing via a mailing receipt and verification that mail was delivered.

Check related plan and employer records: Check other plan records as well as
records for other company benefits such as health insurance plans.

Check with the participant’s plan beneficiary: Check with the designated
beneficiary to see if he or she can provide contact information that may help
locate the missing individual.

Use free internet search tools: These tools include search engines, public
records databases, obituaries and social media sites.

Reasonable Additional Steps

If none of the required search methods is successful in locating the
participant, the plan fiduciary needs to consider whether it would be prudent to
use other methods, such as fee-based internet search services, commercial
locator services and credit reporting agencies.

If the cost of using these services will be charged to the participant’s
account, the plan fiduciary will need to consider the size of the participant’s
account balance in relation to the fees that would be incurred when deciding
whether to use any of these alternatives.

What are the Options if the Participant Cannot be Found?

Due to the lack of regulatory guidance regarding uncashed checks, the
challenge for plan sponsors is how to appropriately handle these assets while
meeting their fiduciary responsibilities. The best practice solutions available
to plan sponsors depend on whether a plan is ongoing or terminating and the plan
document provisions. They include:

Return Funds to the Plan

If the account balance exceeds $5,000, return the funds to the plan and
reestablish the participant’s account so that new earnings will accumulate. The
plan sponsor must decide how to invest the assets, address restoring withheld
taxes and determine if interest should be added to the account. If Form 1099-R
was previously submitted to the IRS, a corrected one should be filed.

Forfeit the Account Balance

Many plans include provisions that allow account balances under $1,000 to be
forfeited. If the participant comes forward in the future, the plan must make
him or her whole by reinstating the forfeited amount and paying the
distribution. If sufficient funds do not exist in the plan’s forfeiture account
at the time payment is requested, such amounts will need to be paid by the plan

The plan should have rules and procedures addressing the time frames and
circumstances in which assets may be forfeited if accounts remain unclaimed and
the procedures for reinstatement if later claimed. To provide for possible
future distribution requests, should a participant reappear, the plan sponsor
must keep records of the forfeited account balances of missing participants.

Forfeiting funds without making reasonable efforts to locate missing
participants raises compliance issues, especially if the plan uses forfeitures
to reduce employer contributions.

Roll Over Assets to an IRA

The DOL has provided guidance on using automatic rollovers to roll assets of
less than $5,000 into an IRA in the name of the missing or unresponsive
participant or his or her beneficiary. Rollover IRAs are a viable transfer
option for active plans with a mandatory cash out provision. Moving uncashed
check assets into IRAs can:

  • Preserve the tax-deferred status of
    participants’ retirement accounts;
  • Simplify plan administration;
  • Lower overall plan costs; and
  • Reduce potential fiduciary risk.

By utilizing automatic rollover IRAs, plan sponsors will be deemed to have
met their fiduciary responsibilities, freeing them from the ongoing fiduciary
and administrative burden of uncashed checks/unclaimed plan assets.

Most IRA custodians will take multiple steps to locate the participant to
reunite him or her with the newly created account, conducting research in an
attempt to locate and notify the appropriate parties. The plan sponsor should be
careful to choose a rollover IRA custodian that has effective search procedures
in place, as well as a proven record of reuniting plan participants with their

Regulations provide a safe harbor method to satisfy fiduciary duties in
selecting the IRA provider and the default investment. Specifically, an
automatic rollover of a cash out distribution will satisfy the safe harbor if
the following conditions are met:

  • The rollover amount cannot be more than
    $5,000, unless from a terminating defined contribution plan;
  • The account balance must be rolled over
    to an entity authorized by the IRS to act as an IRA custodian, such as a trust
    company, bank, credit union or registered mutual fund;
  • The rolled over money must be invested
    in a product that meets requirements relating to preserving principal and
    providing a reasonable rate of return and liquidity;
  • The fees and expenses for the IRA
    cannot be more than the fees and expenses the IRA provider charges for similar,
    non-automatic rollover IRAs; and
  • The participant must have the power to
    enforce the terms of the IRA.

Withholding 100% of the Participant’s Account Balance is
not an Option

In the past a popular practice was to simply pay the entire amount of the
distribution to the IRS as income tax withholding. Although very clean and
efficient from the plan sponsor’s perspective, the IRS issued guidance
indicating such practice was not acceptable. Therefore, sponsors should no
longer pursue 100% withholding as an option.

Preventive Action Tips

Plan sponsors should take actions to reduce the occurrence of missing
participants and uncashed checks such as:

  • Periodically review and cancel uncashed checks and take appropriate steps in
    accordance with the plan document and procedures;
  • Include reminders on all plan
    communications to participants to update their contact information;
  • Require beneficiary contact information
    on beneficiary designation forms;
  • Do searches immediately when mail is
  • Request a personal email address and/or
    cell phone number during the exit process and emphasize that any change of
    address must be reported to the employer;
  • If the plan document calls for
    mandatory cash outs and/or rollovers, do so promptly. Failure to proceed is a
    violation of plan terms; and
  • For balances under $200, pay out the
    participant ASAP after termination as no withholding or distribution forms are


Uncashed checks remain plan assets and fiduciaries remain responsible for
appropriately managing the funds and making sure missing participants receive
their money.

In the absence of formal regulatory guidance for dealing with uncashed checks
and missing participants, it is important to have written procedures in place
for addressing these issues and documentation that the procedures were followed.

As the saying goes, an ounce of prevention is worth a pound of cure. In the
case of uncashed checks and missing participants, there are many steps a plan
sponsor can take to keep these potentially bothersome situations from becoming
big headaches.


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