When employees leave your company, their retirement plan balances don’t always go with them. Over time, those small, inactive accounts can pile up. This creates extra work, higher administrative costs, and potential compliance headaches for your team. That’s where involuntary distributions (also known as force outs) come in.
These provisions allow plan sponsors to automatically cash out or roll over small account balances for former participants who meet certain thresholds. It’s a simple way to keep your plan clean, efficient, and compliant. Of course, it’s important to understand the rules that come with initiating 401(K) forced distributions or forced IRA withdrawals.
In this blog, we explain more about why these provisions are important and how the rules work.
Why Force Out Provisions Matter
Cleaning up these accounts isn’t just about convenience. Managing former participant balances properly can reduce plan fees, limit audit exposure, and make annual reporting easier. More importantly, it ensures you’re following IRS and DOL requirements – helping protect both your plan and your participants.
How the Rules Work
Retirement plans are allowed to automatically “force out,” or cash out, balances for former terminated participants. Here are some guidelines:
- These participants must have a vested balance of less than $7,000 without participant consent.
- For balances between $1,000 – $7,000, the plan may process an automatic rollover to a qualified IRA custodian.
- For balances under $1,000, a check can be issued directly to the participant.
Understanding Rollover Balances
Rollover balances can be excluded when determining which accounts qualify, so it’s important to understand exactly how your plan defines “vested balance.”
For example, if a terminated participant has a $20,000 total account balance, but $16,000 of that came from a rollover, the participant is eligible for an automatic IRA rollover because only $4,000 counts toward the threshold.
Following Compliance Requirements
If involuntary distributions are selected in your plan document, you must follow the mandatory cash-out rules. That means reviewing all terminated participant accounts at least once a year and taking the necessary action to distribute eligible balances. These distributions can occur without the participant’s authorization, as long as you’ve provided at least 30 days’ notice of the pending distribution.
That notice must:
- Explain what will happen if the participant doesn’t make an election (for example, whether the account will be paid by check or rolled over)
- Include the special tax notice
- Specify the deadline for making an election
If the account is rolled into an IRA, the notice must also disclose details about the IRA provider, associated fees, and contact information.
Balances under $200 can be cashed out without notice. If the balance is smaller than the processing fee, it’s common practice to pay the account balance as a fee to the recordkeeper to clear out the account.
Cleaning up these former participant accounts can save time and money by reducing plan fees, audit risk, and administrative workload – all while keeping your plan in compliance.
Ready to Simplify Your Involuntary Distributions?
At Watkins Ross, we help our clients streamline their company’s retirement plans by identifying and processing eligible force outs, updating plan documents as needed, and ensuring every step complies with IRS and DOL requirements. Our goal is to make plan administration easier, reduce unnecessary costs, and keep your plan running smoothly.
If you have any questions about force-out limits or involuntary distributions such as 401(K) forced distributions or forced IRA withdrawals, or how these rules apply to your plan, we’re here to help. Give us a call at 616-456-9696, or send us a message online. Our team can help you stay compliant and confident in managing your retirement plan responsibilities.
