These distributions are known by many names: force out distributions, mandatory cash out distributions, automatic rollovers, or involuntary distributions. Although they are known by different names, they all function the same way. A Plan Sponsor must automatically “cash-out” a participant’s small account balance on termination of employment without the participant’s consent. For most of our plan documents, a small account balance is defined as being a vested account below $5,000, although some plans may define the limit as $1,000.
Plan documents have provisions that require these force out distributions. It is optional to add it to your plan, but if your plan has force out language, then you must follow it to comply with the plan document language. Plans must perform these distributions periodically, which can be interpreted to mean continually, quarterly or annually. The small account balances are forced out of the plan to be rolled into an IRA outside of the plan assets. In some circumstances, some account balances can be cashed out directly to a plan participant.
Terminated participants must be notified before any force out distribution is processed. The Plan Sponsor must give the participant 30 days notice prior to forcing their account balance out of the plan. The notice must explain what happens if a participant fails to withdraw their account balance and inform the participant of the deadline before the account is forced out to an IRA. The notification will also need to have a special tax notice. We include these notifications in our distribution paperwork.
The IRA provider used by most of our clients is Hand Benefits & Trust Company. If a former participant notices that their money has left their account without their consent and the account is under $5,000, it has likely been forced out of the plan. Hand Benefits can be contacted at 1-866-401-5272. Once the money is transferred to an IRA at Hand Benefits, they will continue to reach out to the terminated participants.
There are many reasons why force out distributions are positive for Plan Sponsors. First, service provider fees are often based on the number of participants in the plan. Eliminating those with less than $5,000 account balances can reduce the overall cost of the plan. Also, distributing those people from the plan means that you no longer need to track them down to send them the annual required notices. In addition, it can reduce the total number of participants to below the threshold needed for a plan audit. Lastly, it eliminates some of the headaches for record-keeping such as having to report those terminated employees on your Form 8955-SSA filing.
Force outs help keep the plan from having many annoying small balance accounts. It does require some work to continuously force these individuals out of the plan, but you need not worry as we take responsibility for monitoring and implementing these distributions. If you have any questions about the process or the part that we play, please contact your plan consultant.