Uncashed 401(k) Checks: An Issue that’s Gaining Attention

Until recently, uncashed distribution checks were thought to be a relatively minor issue for retirement plans. As James Haubrock, an executive committee member of the American Institute of CPAs, testified before the ERISA Advisory Council in 2013, “Historically, the total dollar amount of unclaimed benefits and uncashed benefit payment checks in employee benefit plans generally has not been what auditors would consider ‘material’…”^[1]

However, he went on to explain that the dimensions of the issue have changed during the past decade. Widespread adoption of automatic enrollment features, along with increasing rates of voluntary employee turnover (up about 4% in the United States from 2011 to 2014),[2] and automatic distributions of smaller account balances have had a profound effect on the dollar value of assets represented by uncashed checks.

It’s an issue that has gained the attention of the U.S. Department of Labor (DOL). The DOL estimates that millions of retirement dollars go unclaimed each year because plan participants, or their beneficiaries, have failed to cash distribution checks. [3] And it’s rapidly becoming a material issue for retirement plans, especially the larger ones.

Looking for guidance?

The funds represented by these uncashed checks remain plan assets and so plan sponsors retain fiduciary responsibility for them. Failing to implement a solution that suitably addresses this issue is a potential fiduciary liability that they should proactively seek to avoid.

To-date, neither the DOL nor the Internal Revenue Service (IRS) has provided definitive guidance about the appropriate steps to take regarding uncashed checks.

The issue was last reviewed by the 2013 ERISA Advisory Council, which notified the Secretary of Labor that guidance was needed in several areas related to uncashed checks. These included:[4]

• Approved and safe harbor methods for locating lost participants
• ERISA pre-emption of state unclaimed property laws
• Plan asset status of funds held in omnibus accounts and uncashed checks
• Appropriate accounting treatment
• Appropriate reporting and disclosure on Form 5500

Until clear 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 should describe or refer to plan procedures which describe: 1) the steps that will be taken to locate lost or non-responsive participants, 2) the time frames for banks or the plan administrator to report uncashed checks to the plan (typically, 90 to 180 days) and, 3) how the funds from uncashed check will be handled if the participant cannot be located. Separately, 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.

Deciding what to do with uncashed check assets

The solutions available to plan sponsors depend on whether a plan is active or terminating, and may include:

Returning the funds to the plan: Funds remain plan assets, and the plan sponsor retains fiduciary responsibility, as well as responsibility for locating the missing participant. The plan sponsor must decide how to invest the assets, whether to restore withheld taxes, and whether interest is owed on the account. In addition, if a Form 1099-R was previously submitted, a corrected 1099-R should be filed.

Escheating unclaimed benefits: In 2009, at during a session with the American Bar Association’s Joint Committee on Employee Benefits, the DOL confirmed that escheatment is NOT an option for uncashed check assets in active plans.[5] However, the fiduciary of a terminating DC plan has leeway to move missing participants’ account balances to State Unclaimed Property Funds or federally insured bank accounts but only if for some compelling reason, the plan fiduciary rejects moving the assets to IRAs.[6]

Moving the assets to IRAs: The DOL has provided guidance on using automatic rollovers to roll assets into an IRA for missing or unresponsive participants. Rollover IRAs are a viable transfer option for active plans with mandatory cash out provisions.[7] In addition, moving uncashed check assets into IRAs can:

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

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 assets.

The convergence of automatic plan features and higher employee turnover has created a new challenge for plan sponsors: addressing uncashed check assets. Automatic Rollover IRAs continue to play an important role in the policies and procedures developed by many plan sponsors and service providers.

[1] Haubrock, James. Testimony of James Haubrock, CPA. ERISA Advisory Council. August 28, 2013. [http://www.dol.gov/ebsa/pdf/AICPA082813.pdf] [2] Elkjaer, David. Filmer, Sue. The Results from Mercer’s 2014 Turnover Survey, and Dealing with Unwanted Attrition, July 16, 2015. [http://www.mercer.com/content/dam/mercer/attachments/global/webcasts/trends-and-drivers-of-workforce-turnover-results-from-mercers-2014-turnover-survey.pdf] [3] Gina Martellacci, CPA, Uncashed Checks – A Plan Sponsor’s Headache, https://www. johnsonlambert.com/news-blog/2012/12/11/uncashed-checks-%E2%80%93-plansponsor%E2%80%99s-headache

[4] The 2013 ERISA Advisory Council. Executive Summary to The Secretary of Labor. November 5, 2013. [http://www.americanbenefitscouncil.org/pub/2abc7f21-95f5-5269-ea28-ab038034cf14] [5] American Bar Association. Questions and Proposed Answers for the Department of Labor Staff for the 2009 Joint Committee of Employee Benefits Technical Session Held . May 7, 2009. Page 9. [http://www.americanbar.org/content/dam/aba/migrated/jceb/2009/DOL2009.authcheckdam.pdf] [6] DOL. Field Assistance Bulletin 2014-01. August 14, 2014 [http://www.dol.gov/ebsa/regs/fab2014-1.html#cite-23] [7]  DOL’s Safe Harbor 29 CFR 2550.404a-2