Key Takeaways

• Employers must provide certain notices and disclosures to not only existing participants, but also to terminated participants with account balances every year. This can create an administrative burden.
• Terminated participants who have vested account balances under $5,000 can be forced out

Employer responsibilities to retirement plan participants do not end when participants are no longer with the organization. In other words, just because an employee is no longer with your organization, it doesn’t mean that your fiduciary responsibilities are complete. If your former employee leaves a 401(k) or 403(b) account in your plan, you are still required to look after it. That means providing the IRS-required annual notices and disclosures, among others.

Employer responsibilities for terminated participants

Annual notices and disclosures requirement
We know for certain active participants – that is, existing employees whether contributing to the plan or not – must be provided with certain documents every year, as required by the IRS. Such documents include fee disclosure and Summary Annual Report (SAR). Terminated participants must receive these notices, too!

Employer options to deal with terminated participants

RECENT LAW CHANGE: Under current law, a plan sponsor cannot generally force-out distributions to terminated participants if their account balance (or the value of their accrued benefit) exceeds $5,000. SECURE 2.0 increases the force-out limit to $7,000 effective for distributions made after December 31, 2023.

Terminated accounts under $5,000 can be forced out
Generally, when a participant’s vested account balance is $5,000 or less, the employer can require the participant to take a withdrawal. Depending on the account balance, the payout may be in the form of a cash distribution or by rolling the balance into an IRA. If the participants account balance is $1,000 or less, the employer can cash out the balance and withhold the appropriate taxes. If the balance is between $1,001 and $5,000 the employer can roll over the money into an IRA under the participant’s name.

Employer must give the participant at least 30 days’ notice of the right to request a distribution. Most recordkeeper can now handle the entire force-out process, so be sure to check with them.

Terminated accounts over $5,000 *cannot* be forced out
If the vested account balances are more than $5,000, participants can leave their money as their accounts cannot be legally forced out. Also, employer should not encourage people to withdraw their accounts so as to avoid any legal issues.

Charging terminated participants fees
Employers can charge administrative fees to terminated participants. The DOL and IRS have said that a plan may charge fees to terminated participants so long as the expenses are proper, reasonable and done in a nondiscriminatory manner.

Final words

Managing terminated participants in your retirement plan can go a long way to reducing time and expense in overseeing your plan. It is a best practice to review terminated participants balances at least annually and having procedures in place to make plan administration as efficient as possible.