Effective for distributions after December 31, 2023, SECURE 2.0 allows the plan sponsor to increase the cash-out limit to $7,000 from the previous limit of $5,000.

What is an Involuntary Cash-Out?

Plan sponsors have the option to include plan document provisions allowing them to distribute small vested balances to terminated participants without their consent. If the amount is less than $1,000, a check can be issued, and if it’s between $1,000 and $7,000, the distribution must be automatically rolled over to an IRA established for the participant. The $7,000 cash-out limit is fixed and not adjusted for inflation.

Benefits of Involuntary Cash-Out Provisions

The main benefits of adopting the higher cash-out limit of $7,000 are:

• Forcing out small balances may help the plan maintain it’s small plan filer status to be eligible for the waiver of the requirement to have an audit.
  • Effective in 2023, the DOL changed the Participant-Count Methodology for determining if a plan will be subject to audit. The counting methodology for determining the 100-participant threshold for defined contribution retirement plans will be based on the number of participants with account balances, rather than the previous method that counts individuals eligible to participate even if they have not elected to participate and do not have an account in the plan.
• Possible reduction in plan-related fees. Some plan service providers have a fee schedule based partly on the number of participants with a balance in the plan.
• Reduces the likelihood of “lost” participants. Once a participant terminates, it can be challenging to maintain accurate contact information or obtain updated information if the participant changes addresses.

Next Steps

• Review your current plan document to determine if the force-out provisions have been adopted and whether rollover contributions are excluded from the threshold.
• Discuss with the plan’s recordkeeper or TPA the process for increasing the force-out limit to $7,000. Also, discuss their force-out procedures, including clarity on providing participant notices and the service provider for the IRA accounts.
• Be proactive in managing small balances, especially if the number of account balances is close to the audit requirement.
• Ensure the SECURE 2.0 Amendment with the higher cash-out limit is timely executed by December 31, 2026.

Please contact us to arrange a consultation for additional guidance and practical considerations.