Employees typically have several options regarding their existing 401(k) or 403(b) balances when they leave a company or employment is terminated. Those may include moving the money into an IRA, moving it into a new employer’s plan, or leaving their account with their former employer. But just because an employee is no longer with your organization, it doesn’t mean that your fiduciary responsibilities are complete.
Challenges of Managing Terminated Employee Accounts
If your former employee leaves a 401(k) balance in your plan, you are required to manage it. One of the many reasons to keep an eye on terminated employees with balances is that they count towards “eligible participants” when determining if your plan will be considered a “large plan” of 100 people or more that requires an audit. Forgotten or ‘left behind’ accounts can also create challenges for employers, such as having to provide notices, disclosures, and annual account statements. This creates additional work, costs money, and creates potential issues including trying to keep contact info up to date for individuals no longer associated with your company. Fortunately, there are some things you can do to reduce the participant count related to balances of terminated employees.
Strategies for Reducing Participant Count
- Force-Out Balances: As of 2024, due to the SECURE ACT 2.0, if a terminated employee’s balance is $7,000 or less, you may be able to force them out of the plan. This option must be included in your plan document and can be easily added through an amendment if it’s not already permitted. After a 30-day written notice to the terminated employee, your third party administrator (TPA) & recordkeeper will coordinate the roll out of the balance from your plan. When this occurs, the terminated employee’s savings are automatically rolled into an IRA in their name. The IRA provider notifies the employee about the transfer and how to access their new account.
- Outreach Programs: If a terminated employee has a balance greater than $7,000, you can’t directly force them out of your plan. Instead, you can start an outreach program for the terminated participant to encourage them to review their options. The outreach program can include calling them, sending letters, and providing additional information about their options of rolling out or remaining in the plan.
- Participant Fees: You can charge terminated participant fees. In Field Assistance Bulletin No. 2003-03, the Department of Labor (DOL) has stated that a plan may charge fees so long as the expenses are reasonable, proper, non-discriminatory, and the Summary Plan Description incudes a statement describing the conditions for those charges.
Keeping Contact Information Updated
An issue we often see is that the contact information for terminated employees becomes stale. People move, change phone numbers, and change jobs. We recommend making clear employees’ options about their 401(k) savings when they leave the company. You should also encourage them to update contact information if things change in the future.
If you are unable to contact a terminated employee, the DOL has issued some guidelines to help companies understand their responsibilities.
Steps to Locate Terminated Employees
- Send a certified letter to the employee’s last known address and retain proof of delivery or non-delivery.
- Review other records for contact information, including human resource files, healthcare (COBRA) info, or unemployment records.
- If available, contact the terminated employee’s designated beneficiary and ask if they can provide current contact information.
- Utilize free search options online or any no-cost search features of your TPA and recordkeeper.
Best Practices
If all else fails, a commercial locator service, which can be paid from the participant’s investment balance, may be used to find a participant. The plan sponsor is still required to monitor the service provider and determine if the cost is reasonable relative to participant’s balance.
Managing terminated employees in your retirement plan can greatly reduce time and expense in overseeing your plan. We believe it is best practice to review terminated employee balances at least annually and have procedures in place to make plan administration as efficient as possible.
Visit our retirement plan services page for more information or contact us at (585) 381-4180 or info@armbrustercapital.com.