During the recent 401(k) plan audit season, we noted a recurring issue. At several clients there were uncashed distribution checks to former participants. While this sounds harmless, it can be a serious issue. The Department of Labor (“DOL”) has stated that it believes these uncashed checks remain plan assets. And, unfortunately, neither the IRS nor DOL have provided clear guidance for plan sponsors to resolve this issue.
As these checks are considered plan assets, fiduciaries of the plan (e.g. HR representative) should be working with their third party administrator to locate such participants. Further, if these funds are being held in an interest bearing account there are several actions necessary in order to avoid “self-dealing” violations under ERISA guidelines.
Until guidance is provided it seems a best practice to automatically rollover these funds to an IRA for the benefit of the participant. But it is critical in these scenarios for the plan administrator to clearly document the process for uncashed distribution checks. Lastly, to facilitate this process it is important to have adequate internal controls to identify and monitor uncashed distribution checks.
If you have any questions or comments regarding this information please let us know at (818) 789-1179.