Revenue Ruling 2025-15 provides crucial clarification for plan administrators and tax professionals regarding federal income tax withholding and reporting obligations when retirement plan distribution checks remain uncashed and subsequent checks are issued. This analysis delves into the facts presented in the ruling, the Internal Revenue Service's (IRS) legal interpretation, its application to the specific scenario, and the definitive rules established.

Factual Background of the Ruling

The ruling centers on Employer M, the plan administrator of Plan X, a qualified retirement plan under section 401(a). Plan X does not feature designated Roth accounts, employer securities, or benefits described in sections 104 or 105. Individual C, a U.S. person utilizing a calendar year taxable year, held an accrued benefit in Plan X valued at $800. Notably, Individual C had not made a withholding election under section 3405 and possessed no investment in the contract as defined by section 72 with respect to this accrued benefit.

In 2024, Employer M initiated a designated distribution, as defined in section 3405(e)(1), of Individual C’s $800 accrued benefit. Federal income tax was withheld in the amount required under section 3405, thereby reducing the accrued benefit by the withheld sum. This withheld amount was subsequently remitted to the Department of the Treasury. A check for the remaining balance, referred to as Check 1, was then mailed to Individual C’s address on file.

Following this designated distribution, Individual C did not accrue any additional benefit under Plan X due to compensation or service for Employer M. Check 1 was not cashed within six months of its issue date, leading Employer M to cancel it. Subsequently, Employer M issued and mailed a second check, Check 2, representing Individual C’s accrued benefit at the time of Check 2’s issuance, net of any applicable withholding required under section 3405. The ruling clarifies that the outcomes would be identical if the drawee was no longer obligated to make a payment for Check 1 for any other reason.

Analysis of Withholding Obligations

General Principles of Withholding for Designated Distributions

Section 3405 outlines the federal income tax withholding rules for designated distributions. For specified plans, including those described in section 401(a), the plan administrator is generally responsible for withholding and liable for the payment of the tax, unless they explicitly direct the payor to withhold and provide the requisite information as specified by regulations. Section 3405(f)(1) stipulates that any designated distribution is treated as if it were wages paid by an employer to an employee, subject to withholding under section 3402.

Adjustment or Refund for Uncashed Check 1

The IRS analyzed the applicability of adjustments or refunds for the tax withheld on Check 1.

Adjustments under Section 6413(a)(1): This section provides for proper adjustments, without interest, if more than the correct amount of tax imposed by section 3402 is paid. However, an adjustment under section 6413(a)(1) is only available under limited circumstances:
- If more than the required amount was deducted and withheld by the employer or withholding agent, AND the employee was reimbursed within the same calendar year in accordance with Treas. Reg. § 31.6413(a)-1(b)(1)(i).
- If there was an overpayment of tax attributable to an administrative error, defined as an error involving the inaccurate reporting of the amount withheld, pursuant to Treas. Reg. § 31.6413(a)-2(c). In the facts presented, Employer M withheld the exact amount required by section 3405 and remitted that amount to the Treasury Department. Consequently, because more than the correct amount of tax was not withheld or paid, Employer M is not entitled to an adjustment under section 6413(a)(1).
Refunds under Section 6413(b) or 6414: Section 6413(b) allows for a refund if an overpayment cannot be adjusted under section 6413(a). Similarly, section 6414 provides circumstances for a refund or credit to the employer or withholding agent. However, the refund authority under both sections 6413(b) and 6414 applies only if the amount paid to the Treasury Department was in excess of the amount deducted and withheld by the employer or withholding agent, per Treas. Reg. § 31.6413(b)-1 and § 31.6414-1(a)(1). Since Employer M deducted and withheld the required amount, and this was the same amount paid to the Treasury, Employer M is not entitled to a refund under section 6413(b) or 6414.

Withholding for Subsequent Check 2

The withholding obligations for Check 2 depend on the accrued benefit's value at its issuance:

If the amount of Individual C’s accrued benefit under Plan X at the time Check 2 is issued is less than or equal to the amount of Check 1, no federal income tax withholding is required for Check 2. This is because Employer M already withheld the mandated amount under section 3405 from the initial distribution related to Check 1.
If the amount of Individual C’s accrued benefit under Plan X at the time Check 2 is issued is greater than the amount of Check 1 (e.g., due to accrued earnings), this excess amount is considered a separate designated distribution subject to withholding under section 3405 at the time Check 2 is issued. It's worth noting that some exceptions to withholding exist, such as for eligible rollover distributions less than $200 (subject to aggregation rules), per Treas. Reg. § 31.3405(c)-1, Q&A-14.

Analysis of Reporting Obligations

General Reporting Requirements

Section 6047(d) mandates that the Secretary of the Treasury require employers or plan administrators to file returns and reports concerning plans from which designated distributions are made. This reporting is generally accomplished using Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.. A critical threshold exists: no return or report is required for distributions to any person during any year unless the distributions aggregate $10 or more.

Under the 2024 instructions for Form 1099-R, a Form 1099-R must be filed for each person receiving a designated distribution of $10 or more.

The total amount of the distribution (before federal income tax or other withholding) must be reported in Box 1.
The taxable amount must be reported in Box 2a, unless the plan administrator cannot reasonably obtain the necessary data to compute it.
The federal income tax withheld must be reported in Box 4.

Reporting for Uncashed Check 1

With respect to the initial distribution of Individual C’s accrued benefit at the time Check 1 was issued:

Employer M must report the $800 designated distribution in Box 1 of Form 1099-R for 2024.
Since Individual C had no investment in the contract under section 72 and no exception to income inclusion under section 402(a) applied, Employer M must also report the same amount ($800) in Box 2a.
The federal income tax withheld must be reported in Box 4. Importantly, this reporting requirement applies regardless of whether Check 1 was returned as undeliverable or remained uncashed for any other reason.

Reporting for Subsequent Check 2

The reporting obligations for Check 2 are contingent on the accrued benefit’s value relative to Check 1:

If the amount of Individual C’s accrued benefit under Plan X at the time Check 2 is issued is less than or equal to the amount of Check 1, Employer M is not required to report the distribution on Form 1099-R.
If the amount of Individual C’s accrued benefit under Plan X at the time Check 2 is issued is greater than the amount of Check 1, Employer M generally must report the excess amount in Box 1 and Box 2a on Form 1099-R for the year of the distribution. Any federal income tax withheld on this excess must also be reported in Box 4 on that Form 1099-R. This reporting is also subject to the $10 reporting threshold under section 6047(d)(1).

Key Determinations from the Ruling

Rev. Rul. 2025-15 establishes the following definitive holdings:

No adjustment or refund is available under sections 6413 and 6414 for the amounts properly withheld and remitted with respect to Check 1.
Regarding federal income tax withholding obligations for Check 2:
- If Individual C’s accrued benefit at the time of Check 2’s issuance is less than or equal to the amount of Check 1, no withholding obligations apply to Check 2.
- If Individual C’s accrued benefit at the time of Check 2’s issuance is greater than the amount of Check 1, the excess amount is subject to withholding in accordance with section 3405.
With respect to Check 1, Employer M must report the $800 designated distribution in Boxes 1 and 2a of Form 1099-R for 2024, and the federal income tax withheld in Box 4.
Regarding reporting obligations for Check 2:
- If Individual C’s accrued benefit at the time of Check 2’s issuance is less than or equal to the amount of Check 1, no reporting obligations apply to Check 2.
- If Individual C’s accrued benefit at the time of Check 2’s issuance is at least $10 greater than the amount of Check 1, the excess amount is subject to reporting in accordance with section 6047(d).

Conclusion

Revenue Ruling 2025-15 provides crucial guidance for plan administrators navigating the complexities of uncashed retirement plan distribution checks. It clarifies that simply because a check goes uncashed, it does not automatically trigger an adjustment or refund for previously withheld and remitted taxes if the initial withholding was correct. Furthermore, the ruling delineates precise rules for withholding and reporting on subsequent checks, emphasizing that any increase in the accrued benefit due to earnings will typically necessitate additional withholding and reporting. Tax professionals should pay close attention to these guidelines to ensure proper compliance for retirement plan distributions.

Prepared with assistance from NotebookLM.