5 Reasons Not To Re-deposit Uncashed Checks Back To A Qualified Plan

A client contacted us here at PenChecks, asking for advice on a letter they received from an institution acting as custodian of their 401(k) Plan. At first blush, the letter seemed simple enough. It provided the plan sponsor with a list of "Stale Dated Checks" and included instructions on how to have the institution return the stale-dated amounts back into the cash account of the plan. It's important to note that the distributions had been made as lump sum payments with taxes withheld.

On the surface this seems a harmless and reasonably structured process to reissue the checks or to return the funds to the plan. What was missing was any discussion of fiduciary implications or how to deal with the obligations of such checks, especially with respect to returning the money to the plan when these monies were no longer qualified funds.

While this is not an uncommon circumstance, it is our observation that it is widely misunderstood and frequently mishandled. Plan sponsors and service providers need solutions that will not compromise their fiduciary obligations as well as the plan's tax exempt status.

5 Reasons why we believe it is inappropriate to redeposit these funds back to the qualified plan:

• These checks are no longer plan assets. The funds were withdrawn from the plan, the check sent to the participant, and 1099-R filed and when applicable, taxes withheld. The payees are no longer plan participants nor employees of the plan sponsor. There is a real question as to whether or not a plan could legally accept these funds now.
• Even if there is a basis for restoring these plan accounts, how should they be handled? Putting them in the cash account is probably not appropriate. If the plan were to hold these amounts on behalf of participants, they should probably go to the QDIA.
• If the funds are returned to the plan, does the plan sponsor have to restore forfeitures to participant accounts if the former participants were partially vested and have been forfeited? Are make-up earnings necessary?
• If the funds are returned to the plan, the plan sponsor is assuming a fiduciary duty to attempt to locate the payees (former participants) and properly handle the funds on their behalf. We believe that the plan sponsor fulfilled its duty to the participant when it sent the check. These were not normally missing participants, they completed the withdrawal forms and in many cases were handed the check personally, but did not cash them.
• Under the new PPA requirements, if these accounts are restored to the plan then the sponsor must attempt to deliver PPA-required notices or risk the civil penalties that could be levied for failure to do so.

After much research, PenChecks believes that if the institution cannot restore the taxes withheld under where appropriate to restore the funds back to qualified status in order to establish a Default /Missing Participant IRA then the most appropriate approach is the funds should escheat to the participant's state once the applicable period of time has elapsed.

PenChecks' work in this area led to the Missing Distributees Program. Record keepers or institutions can transfer these amounts to PenChecks. The assets are held on an after-tax basis in an interest bearing account legally separate from the assets and liabilities of PenChecks. PenChecks performs a search for the participant, registers the account with the National Registry for Unclaimed Retirement Benefits and starts the escheat clock running based on the participant's state of residence. This is an efficient outsourcing service that allows clients to clear these checks from their books and avoid monitoring and dealing with all the different escheat laws in all the states.
Whether you consider the PenChecks program or opt to take on the administrative burden in-house, we strongly believe these funds should not go back to the plan but ultimately should escheat if the tax cannot be restored.

For more information on the PenChecks Missing Distributees Program, contact us today