Plan Sponsors Should Cash Out 401(k) Plans for Former Employees
Many employers may not be aware of the amount of money they needlessly pay for 401(k) plans that belong to employees who are no longer working for their organization. Leftover accounts rack up additional costs because record keepers can base fees on the number of participant accounts or the average account balance.
By following best practices, your organization can clean the books of old benefit accounts.
Employee benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA) are required to have cash out provisions. Because cash outs are mainly distributed to separated employees (terminated, retired, etc.) who are no longer employed with the organization, these provisions often benefit employers.
But these provisions can only help an organization if they are put into action. Otherwise, an employer will end up paying additional costs to maintain small accounts that are left behind in the plan following an employee’s departure.
Reduce excess administrative costs
Cash out distributions occur when a separated participant is non-responsive to plan distribution communications, allowing plan management to initiate the distribution without participant consent.
The plan administrator must provide written notification to the plan participant of the intent to distribute the amount, the tax-treatment of the distribution, and rollover options for the amount. In addition, the administrator must give the participant at least 30 days to respond.
Initiate cash outs with account balances in mind
Cash outs will differ depending on a sponsor’s plan and a participant’s balance remaining on an account. Separated participants with vested account balances of less than $1,000 will be automatically distributed to the participant without their consent in a lump sum payment.
Involuntary cash-outs plan provisions may also include vested account balances between $1,000 and $5,000 to be rolled over to an IRA established by the plan administrator on behalf of the participant.
However, if the separated participant's vested account balance is over $5,000, it cannot be distributed without the participant's consent. At all times, the participant may request to have their account balance distributed in an alternative form by completing a distribution form.
How we can help
Reviewing your benefit accounts at least once annually can help make sure that you’re not paying for individuals who are no longer employed by your organization. CliftonLarsonAllen’s employee benefit professionals can help you track down accounts that are unnecessarily generating account fees — and help you cash out of them.