The Un-Cashed Check Debate Heats Up
A!er decades of neglect, the issue of un-cashed retirement distribution checks – a multi-billion dollar problem – is finally starting to appear on the radar screen of financial institutions, auditors and regulators. As someone who has been intimately involved with the issue since 1966, I believe the increased attention is long overdue.
Currently, the un-cashed check situation remains unsettled at best. Plan administration costs continue to grow. Escheating of un-cashed checks, long considered the default position of many plan sponsors and institutions, is increasingly viewed as untenable. And continuing failure of plan sponsors to uphold their fiduciary responsibilities increases the risk of costly lawsuits.
Some organizations have presented automatic rollover IRAs as an easy solution to the problem. Based on two decades’ experience managing un-cashed pension checks, PenChecks believes the problem requires a more comprehensive solution. Our industry has finally started to engage in the conversations required to come up with a workable solution. But much disagreement remains on the nature of that solution.
For example, at the 2013 ASPPA annual conference, a senior benefit law specialist with the Department of Labor (DOL) presented an advisory letter from an private attorney to a plan sponsor stating that once a distribution is made from the plan, the money is no longer considered part of the plan assets. The DOL disagreed with this interpretation, implying that any distribution remains a plan asset until a check is cashed or a wire transfer successfully completed.
During the same session, the president of a financial services consulting firm suggested that un-cashed retirement plan checks present a larger problem than most institutions realize, and estimated the average un-cashed benefit check at around $42,000. She then suggested that, absent guidance, plan sponsors and record keepers should establish written procedures for handling un-cashed checks.
In working with dozens of institutions, PenChecks has found that some have established policies and procedures while others do not. Of those that do, many are based on dubious interpretations of how to handle unclaimed participant funds. For example, one institution we worked with had a policy stating that all un-cashed checks will be forfeited. Furthermore, this institution pointed to their own plan document as the source of authority for forfeiting such checks – in spite of the fact that this practice could potentially disqualify the plan. Hopefully, the IRS would not disqualify a plan with such a provision. But in the absence of appropriate guidance, why place a client in potential jeopardy when simpler and less risky solutions exist?
It can also be argued that such policies do not represent the best interests of the plan sponsor or plan participants. Considering that many institutions have no policies or procedures at all, the retirement industry’s compliance functions would be well served if the IRS and the DOL would end the debate by issuing clear guidance on how to handle un-cashed checks.
Where Do We Go From Here?
One potential solution would involve reporting uncashed checks on form 8955SSA. This would protect the participant’s benefit, even if forfeited, for as long as the plan remains in existence. However, once the plan is terminated or merged, the likelihood of being able to process the benefit disappears – even if the policy mandates that all forfeited participant accounts be restored and placed into an IRA.
PenChecks believes a better approach would establish an IRA account at the outset rather than forfeiting the account. Nevertheless, the idea of reporting forfeiture accounts to the Social Security Administration is a good one, although the idea of the plan reporting the establishment of a default IRA and its owner seems even better.
As part of this approach, the fees associated with uncashed checks should also be disclosed under 404(a) (5). Many third-party administrators (TPAs) have begun making reasonable attempts to disclose such fees when disclosing what might happen if participants don’t claim their benefits. Some even spell out the fees in the summary plan description. This practice needs to become an industry standard so that plan sponsors can better understand the ramifications and expenses they will incur. It might also motivate all involved to take the un-cashed check issue more seriously.
During a panel discussion at the ASPPA conference, the question was raised as to what happens if the record keeper reports un-cashed checks in the 5500. According to an informal survey conducted by the consulting firm, some record keepers already follow this practice. However, just as many TPAs and plan sponsors respond very differently, treating un-cashed checks as being out of the plan. Absent sufficient DOL or IRS guidance, institutions are le! to their own interpretations of how to handle and report uncashed checks.
Join the Conversation
As an organization, PenChecks has spent countless hours developing systems to effectively and efficiently handle these unique and sometimes troubling cases. We believe the time has come to turn up the volume on the conversation so the pension industry can at least hear alternative thoughts around potential processes, procedures and solutions.
We are not suggesting that PenChecks’ processes and solutions are the only ones. But in the absence of comprehensive regulatory guidance, and with many different viewpoints among industry professionals, ongoing dialogue is essential for gaining clarity around this issue. Our goal with this article is to stimulate further discussion within the industry and to encourage the IRS and DOL to come up with the clear regulatory guidance needed to rid us of the uncertainties that currently exist.
We hope you’ll join us in this conversation.
Peter Preovolos is a founder and CEO of PenChecks, Inc., the largest independent provider of outsourced benefit distribution services and Default/Missing Participant IRAs in the country.
Founded in 1994, PenChecks is an expert and industry-leading provider of unique and comprehensive solutions for a myriad of trust resolution issues, including automated and branded solutions. Customers include financial institutions, plan advisors, third party administrators and plan sponsors.