Before we know it, summer will almost be over and fall will be in the air. It is a good time after the summer vacation and 5500 filing to do some clean up on the retirement plan. This fall will also be a time for plan sponsors to take on additional decisions, as many prototypes sponsors are going through the process of getting their documents updated for the upcoming restatement process. While this is a necessary process for everyone, there are decisions that plan sponsors should think about as they go through this process.

One of the items that I think is important is the cash-out level the plan establishes for employees who are terminated. Plan sponsors cannot force employees out of the plan who have a balance greater than $5000, but what about small account balances? Plan sponsors have two choices to choose from as they decide how to deal with them.

First, employers can set their plan to cash out employees who have less than $1,000 in the plan. This is a good way to help keep small account balances to a minimum, but it does take some work from the plan sponsor to keep things up to date. One of the growing problems with the cash out of employees, though, is that the checks can go un-cashed.  While this is not a new problem for the industry, the management of the process or guidance from the Department of Labor or the Internal Revenue Service has been slow to develop. I also believe plan sponsors have not grasped the significance of the problem or the fact that they need to deal with it.

Another option

Another option to consider is to elect a provision to cash out terminated participants with account balances between $1,000 and $5,000 and roll them directly into an IRA, which the plan sponsor establishes for them. While this is a good alternative for plan sponsors to utilize to keep small account balances to a minimum, there are important steps for plan sponsors to consider. The first item is to determine who the IRA vendor is and have the retirement plan committee do some due diligence on them. Along with this, the plan sponsor needs to determine if their vendor can work with the 401(k) vendor and what the administrative process will be going forward.

These are important decisions for plan sponsors to make, as these participants can add additional cost and administrative time to deal with on an ongoing basis. In the end, it is keeping the participant information up to date, and summertime is as good a time as any.

Ludwig, ChFC, AIF, CRPS, is an LPL financial adviser with LHD Retirement. Reach him at

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

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