Beginning this year, plan sponsors may increase their qualified plan’s mandatory cash-out limit from $5,000 to $7,000. The increase was enacted by SECURE 2.0, and applies to distributions made after December 31, 2023. This seemingly small change could have large financial consequences for your plan, especially if you are a small employer.
Mandatory cash-out provisions are optional, but are common and included in most qualified plans. Prior to SECURE 2.0, plan sponsors could require a mandatory cash-out for participants that have terminated employment with a nonforfeitable accrued benefit of less than $5,000 (the limit is not subject to cost-of-living adjustments). Plans may be designed to ignore the value of any rollover contributions (and attributable earnings) in determining the value of a participant’s benefit. It is also important to note that mandatory cash-outs equal to at least $1,000 must be rolled over to an IRA if the participant does not elect to receive the distribution or have the amount rolled over to an IRA or another qualified plan.
There are many reasons plan sponsors might not want to maintain small account balances for terminated employees, but the largest impact will be for small businesses due to the plan’s annual audit requirements. Generally, a plan must file an audit report with their Form 5500 annual filing if the plan has 100 or more participants with account balances at the beginning of the plan year. The cost and administrative time spent preparing the plan audit can be substantial. Plan sponsors that are near or approaching the audit participant threshold will want to seriously consider implementing the increased mandatory cash-out threshold.
In addition to the audit threshold, a mandatory cash-out of small account balances eases the burden on plan administration by limiting the number of plan participants. Mandatory cash-out distributions are also being triggered while participant contact information is current. By implementing more mandatory cash-outs today, a plan sponsor will not have to spend time and money in the future searching for participants long after they terminated employment to connect them with their relatively small benefit.
The first step you will want to take in implementing the $7,000 cash-out will be to connect with your plan’s recordkeeper. Although plans can begin using this feature today, not all recordkeepers have updated their systems to administer the new cash-out value. Once systems are in place, plans can begin operation immediately, and don’t forget that the plan document will have to be updated by SECURE 2.0’s revised amendment deadline of December 31, 2026. If you have any questions on implementing this or any of the other SECURE 2.0 provisions, please contact any of the attorneys in our Employee Benefits group.
