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 might leave their 401(k) savings behind. Even though the employee has moved on, you still have administrative and fiduciary responsibilities towards them if their assets remain in the plan, regardless of their account balance. Tracking down accurate addresses, sending annual notices, and providing fee/fund updates can be time-consuming and pose a potential compliance risk.
While it might be beneficial for some former employees to maintain their assets in your plan, a buildup of small balance accounts could lead to additional administrative burdens. These include challenges like locating lost or missing participants, dealing with uncashed distribution checks, and facing higher plan expenses and costly large plan audit requirements.
This guide will explain how to “clean up” your plan, reducing your costs by streamlining administrative duties and avoiding unnecessary fees and audits. Additionally, it will explore the possibility of accumulating forfeitures to help cover 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, it’s important to go through your list of participants and identify any former employees who still have money in the plan. Depending on how much money they have vested and the cash-out threshold set by your plan, you have a couple of options:
- Roll the money into a Safe Harbor IRA. With Secure 2.0, the limit for this increased from $5,000 to $7,000. This means that as of December 31, 2023, employers can transfer retirement account funds from a workplace plan into an IRA if the balance is between $1,000 and $7,000.
- Cash out the account. If the vested account balance is less than $1,000, you can cash it out and send a check to the participant.
If you are unsure of what your plan allows, review your plan document, or contact us to help you understand what your plan 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.
Participants with balances of over $7,000 cannot be forced out of the plan. 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 us or review your plan document specifics.
Cleaning up small balance accounts in your plan can help alleviate administrative headaches, 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.
If you’d like to speak to us about your 401k, please click on the link below to schedule time with Larry Heller, CFP® or Greg Moss, CFP®
Click here to schedule a call with us
Heller Wealth Management
Phone: 631.248.3600
Website: www.hellerwealthmanagement.com
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, and you should consult your attorney or tax advisor for guidance on your specific situation. ©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.
