IRS Addresses Withholding Issues for Uncashed Retirement Plan Distribution Checks

(Parker Tax Publishing August 2025)

The IRS ruled that no adjustment or refund was available to an employer under Code Sec. 6413 and Code Sec. 6414 for the amounts withheld and remitted with respect to a retirement plan distribution check that was never cashed by the plan member and was cancelled by the employer before sending a replacement check. The IRS also held that if the amount of the individual's accrued benefit at the time of the issuance of the replacement check by the employer was less than or equal to the amount of the uncashed check, then no federal income tax withholding obligations apply with respect to replacement check. Rev. Rul. 2025-15.

Facts

Employer M is the plan administrator of Plan X, a qualified retirement plan under Code Sec. 401(a) that does not include designated Roth accounts under Code Sec. 402A, hold employer securities, or provide benefits described in Code Sec. 104 (compensation for injuries or sickness) or Code Sec. 105 (amounts received under accident and health plans). Individual C, a U.S. person under Code Sec. 7701(a)(30)(A) with a calendar year tax year, has an accrued benefit in Plan X with a value of $800, has not made a withholding election under Code Sec. 3405 with respect to the accrued benefit, and has no investment in the contract within the meaning of Code Sec. 72 with respect to the accrued benefit.

In 2024, Employer M made a designated distribution within the meaning of Code Sec. 3405(e)(1) of Individual C's $800 accrued benefit by withholding federal income tax in the amount required under Code Sec. 3405 (and, thus, reducing the accrued benefit by the withheld amount), remitting that amount to the Treasury Department, and mailing a check for the remainder (Check 1) to Individual C at Individual C's address on file. After the designated distribution was made, Individual C did not earn any additional accrued benefit under Plan X on account of compensation from or service for Employer M. Check 1 was not cashed within six months after the date on the check, and Employer M cancelled the check.

Subsequently, Employer M mailed a second check (Check 2) in the amount of Individual C's accrued benefit at the time of issuance of Check 2 (net of applicable withholding, if any, required under Code Sec. 3405) to Individual C.

Law

Code Sec. 3405 provides federal income tax withholding rules with respect to designated distributions as defined under Code Sec. 3405(e)(1). With respect to Code Sec. 401(a) plans, Code Sec. 3405(d)(2) provides that the plan administrator shall withhold and be liable for payment of the tax required to be withheld under Code Sec. 3405 unless the plan administrator directs the payor to withhold the tax and provides the payor with such information as the Treasury Secretary may require by regulations.

Code Sec. 6413(a)(1) provides that, if more than the correct amount of tax imposed by Code Sec. 3402 is paid with respect to any payment of remuneration, proper adjustments, with respect to both the tax and the amount to be deducted, shall be made, without interest, in the time and manner prescribed by regulations. Under Reg. Sec. 31.6413(a)-2(c), an adjustment is available under Code Sec. 6413(a)(1) only to the extent that more than the amount required was deducted and withheld by the employer or withholding agent and the employee was reimbursed within the same calendar year in accordance with Reg. Sec. 31.6413(a)-1(b)(1)(i), or there was an overpayment of tax attributable to an administrative error - that is, an error involving the inaccurate reporting of the amount withheld.

Code Sec. 6413(b) provides that, if more than the correct amount of tax imposed by Code Sec. 3402 is paid or deducted with respect to any payment of remuneration and the overpayment cannot be adjusted under Code Sec. 6413(a), a refund may be available. Under Reg. Sec. 31.6414-1(a)(1), the refund authority under Code Sec. 6413(b) applies only to the extent that the amount paid to the Treasury Department was in excess of the amount deducted and withheld by the employer or withholding agent.

Similar to Code Sec. 6413(b), Code Sec. 6414 provides that, in certain circumstances involving income tax withholding, a refund or credit to the employer or to the withholding agent may be available. Pursuant to section 6414 and Sec. 31.6414-1(a)(1), the refund or credit authority under section 6414 applies only to the extent that the amount paid to the Treasury Department was in excess of the amount deducted and withheld by the employer or withholding agent.

Holdings

In Rev. Rul. 2025-15, the IRS held that:

(1) No adjustment or refund is available under Code Sec. 6413 and Code Sec. 6414 with respect to the amounts withheld and remitted with respect to Check 1 because the amount deducted and withheld by Employer M from the designated distribution was the amount required by Code Sec. 3405.

(2) If the amount of Individual C's accrued benefit under Plan X at the time of the issuance of Check 2 is less than or equal to the amount of Check 1, no federal income tax withholding obligations apply with respect to Check 2. If the amount of Individual C's accrued benefit at the time of issuance of Check 2 is greater than the amount of Check 1, the excess amount is subject to withholding in accordance with Code Sec. 3405.

(3) With respect to Check 1, Employer M must report for 2024, on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., the designated distribution ($800) in Boxes 1 and 2a and the federal income tax withheld in Box 4.

(4) If the amount of Individual C's accrued benefit under Plan X at the time of the issuance of Check 2 is less than or equal to the amount of Check 1, no reporting obligations apply with respect to Check 2. If the amount of Individual C's accrued benefit at the time of issuance of Check 2 is at least $10 greater than the amount of Check 1, the excess amount is subject to reporting in accordance with Code Sec. 6047(d).

For a discussion of the withholding rules for designated distributions, see Parker Tax ¶212,150.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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