Are You Giving Good Advice Regarding Uncashed Pension Checks?

By Peter E. Preovolos, CEO, PenChecks Trust

The Department of Labor (DOL) and IRS have been, for lack of a better word, unclear on its guidance to pension plan sponsors and third party administrators (TPAs) when it comes to uncashed pension checks. These checks, while cut, have not been received – let alone deposited – by individual participants.  What happens instead is concerning from a fiduciary standpoint, and could be big trouble if discovered in an audit.

Uncashed checks are typically dealt with in very precarious ways. The custodian (or in rare cases, a plan sponsor trustee) may wind up holding onto the funds without depositing them back into the plan, generating interest on the float as a result. Other scenarios are that the funds are deposited erroneously into the pension plan’s forfeiture account or rolled over into an IRA account without restoring the taxes.

None of these are legally viable. Plan sponsors and their administrators have an inherent responsibility to ensure that participant distributions are received by the intended participants. It is a breach of fiduciary responsibility to allow a custodian to sit on non-negotiated assets and earn float. Sadly, all too often, such is not the case. Granted, TPAs and plan sponsors must grapple with many gaps in the current regulations. Case in point, the DOL has often stated that withheld taxes are still considered qualified plan assets, though there are no regulations that specifically support this position. Furthermore, if the funds in question came from an employee’s salary deferrals, and the institution places those funds into a forfeiture account, there is no expressed authority that can forfeit funds that are 100% vested.

Faced with such ambiguity, many service providers are simply rolling missing participant funds into a Default IRA. However, if taxes have been withheld, even more questions arise as to the legality of such a move since taxed plan distributions are no longer qualified assets.

To arbitrarily ignore or refuse to restore a participant’s full account balance (including taxes withheld) represents a serious violation of an institution’s fiduciary responsibility. Yet, I have even seen cases where institutions return funds to a plan as forfeitures even when the plan does not contain provisions for how the funds should be managed. In my opinion, this runs the risk of setting the plan up for potential disqualification or intense scrutiny by the DOL, IRS or both.

Given all of this, I offer the following positions as the most prudent to adopt when dealing with uncashed participant distributions.

If funds have gone unclaimed for more than 90 days:

• The participant is owed interest on their money.

• If taxes have been withheld, the issuing institution has an obligation to retrieve those taxes and credit them back to the participant account prior to returning all funds to the plan.
• Finally, the plan should reinstate the participant’s full account (including interest from the custodian) or establish a compliant Safe-Harbor Default IRA.

The problem of how to handle unclaimed funds can be significantly mitigated when TPAs and plan sponsors accept their role as a gatekeeper and properly monitor and manage benefits that are paid. In particular, these entities need to ensure that each benefit payment made from the trust is closely followed until properly negotiated, returned to the plan, or placed into a Default IRA after withheld taxes have been restored. When TPAs and plan sponsors adopt a responsible and diligent stance on uncashed plan distributions it can protect from possible violations of the law, upholds fiduciary responsibility, and ensures retirement assets are protected in the best interest of participants.

About the author: Peter E. Preovolos is CEO of PenChecks Trust, a 20-year provider of distribution services and unique solutions to the retirement plan industry.  PenChecks Trust has been a leading innovator in developing commercial-scale, compliant solutions for missing participants and uncashed checks. PenChecks Trust helps institutions, administrators, advisors and plan sponsors save time, reduce risk and eliminate costs. Peter can be reached at peter.preovolos@penchecks.com.

Photo by Roland O’Daniel via Flickr CC License