Former participants’ small balance accounts could put you and your plan at risk. Here’s how to manage them.
When an employee leaves your company, they may leave their 401(k) savings behind. Although the employee has moved on, you still have an administrative and fiduciary responsibility to them as long as their assets remain in the plan, regardless of their account balance. Tracking down accurate addresses, sending annual notices and fee/fund updates is both time-consuming and a potential compliance risk.
It may make sense for some former employees to continue to keep their assets in your plan; however, a build-up of small balance accounts may create additional administrative burdens, such as lost and missing participants and uncashed distribution checks, along with higher plan expenses and costly large plan audit requirements. This guide will explain how to “clean up” your plan and lower your costs by streamlining your administrative duties and avoiding unnecessary fees and audits while potentially accumulating forfeitures which can towards paying employer contributions or plan expenses.
401(k) Force-Out Benefits
If your plan document includes a “force-out” provision, you may be able to transition former employees out of your 401(k) plan. There are benefits to limiting the number of participants, including:
Lower plan costs
Reduced fiduciary liability
Avoiding a costly independent plan audit (as long as the plan has fewer than 100 account balances)
The Force-Out Process
At least once a year, review your participant roster and check for former employees who still have money in the plan. Depending on their vested account balance and your plan’s cash-out threshold, you can take the following actions:
Vested account balances between $1,000 and $5,000 can be rolled automatically into a Safe Harbor IRA established for the participant. CrossPlans generally works with the terrific provider Penchecks, Inc. but there are a few other solutions as well.
And in 2024, the transferable account range increases to $1,000 – 7,000.
Vested account balances of less than $1,000 can be cashed out, and a check sent to the participant.
While CrossPlans generally writes our Plan Documents to allow ALL vested account balances, even those under $1,000 be rolled over to an outside IRA Provider, like Penchecks, it is important to know and be familiar with what your Plan Document allows.
Participants must be notified at least 30 days in advance and given an opportunity to elect to cash out or rollover their balance to an IRA of their choice and the CrossPlans Distributions team can help support a streamlined process.
Participants with balances of over $5,000 cannot be forced out of the plan (and $7,000 in 2024). In that case, you’ll need to work with your plan service providers to reach those participants and help them determine if it makes sense to roll their remaining savings out of your plan or keep it in the plan. It never hurts to reach out and connect with the former participant.
What About Forfeitures?
When a terminated participant leaves a balance of employer contributions that isn’t fully vested, the non-vested portion is subject to forfeiture.
Non-vested balances are transferred into the plan’s forfeiture account and can be used for a variety of purposes, including:
Administrative expenses
Safe Harbor or employer contributions
Other plan-related expenses
Forfeitures must be used within a specific time frame—generally, no later than the end of the year after the year in which the forfeiture occurred. Check with CrossPlans for your plan document specifics.
Cleaning up small balance accounts in your plan can help alleviate administrative headaches and unnecessary fees, and potentially prevent costly independent audits for plans with over 100 account balances.
We can help you set up a process for removing former participants from your plan while helping them hold onto as much of their retirement savings as possible. Call us today.
CrossPlans
23041 Avenida de la Carlota
Suite 300
Laguna Hills, CA 92653
714.210.4164
949.387.0611 Fax
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements. Consult your attorney or tax advisor for guidance on your specific situation.
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