The Value of Force-Out Provisions
In today’s evolving retirement plan landscape, 401(k) plans can feel increasingly complex to manage. Plan sponsors must balance time, cost, and resources while working to reduce risk and unnecessary expenses. One of the most effective tools available is the plan’s “force-out” provision. This feature allows plan sponsors to automatically distribute or roll over small account balances of former employees, which can meaningfully reduce administrative complexity, lower overall plan costs, and minimize compliance risk.
Under the SECURE 2.0 Act, the maximum balance eligible for a force-out was increased from $5,000 to $7,000. This change allows plan sponsors to remove an even larger number of inactive accounts from their plan while helping former employees maintain access to their retirement savings.
Understanding the Force-Out Tiers
Generally, the force-out threshold applies to a participant’s vested account balance, and plans may choose whether to include or exclude rollover contributions when determining whether an account is eligible for a force-out. The options available for distributing these funds depend entirely on the amounts in the accounts in question.
Tier 1: Accounts Under $1,000
Accounts with vested balances under $1,000 may be distributed directly to the participant by check. Of course, these distributions are generally subject to income taxes and may be subject to an early withdrawal penalty if the participant is under the age of 59½.
It is important to note that plans are not required to cash out these balances. This is merely an option. Plan sponsors may instead choose to roll the funds into an IRA.
Tier 2: Accounts Between $1,000 and $7,000
Participants with vested balances between $1,000 and $7,000 must generally have their balances rolled into a designated rollover IRA established in the participant’s name. This preserves the tax-deferred status of the retirement funds and helps ensure the participant’s savings remain invested for retirement.
Tier 3: Accounts Over $7,000
Participants with vested balances exceeding the $7,000 limit cannot be forced out of an ongoing plan. These participants generally have the right to leave their funds in the plan and elect a distribution at a later date.
Why Plan Sponsors Should Consider an Annual Force-Out Initiative
Many plan sponsors focus on attracting and retaining employees but overlook the growing number of terminated participants who leave small balances behind. Over time, these accounts can create significant administrative challenges.
Conducting a force-out review annually can provide several benefits:
Lower Administrative Costs
Many service providers assess fees based on participant counts. Removing inactive accounts can help reduce recordkeeping, administration, mailing, and participant-related expenses.
Reduce Missing Participant Issues
Former employees often move, change email addresses, or lose track of retirement accounts. Small-balance terminated participants are among the most common sources of missing participant problems. Force-outs help reduce the number of participants that must be tracked and contacted year after year.
Simplify Plan Administration and Lower Fiduciary Risk
Every participant in the plan generates administrative responsibilities. As long as these accounts remain in the plan, the plan sponsor is legally obligated to act in the best interest of former employees. You are required to prepare and send annual notices and disclosures, monitor investment options, and conduct beneficiary maintenance. Eliminating inactive accounts allows plan administrators to focus their time on active employees and more strategic plan matters.
Help Manage Audit Requirements
Much like a snowball rolling down a hill, small balances accumulate over time, artificially inflating total participant count. Once a plan crosses the large plan threshold, it is legally required to undergo annual audits. Facing an audit is no small task. They are time-consuming, expensive, and stressful. Force-outs may help manage participant counts and delay the need for an audit by distributing unnecessary small-balance accounts and reducing the overall participant count.
Review Your Plan Document
Like fingerprints, retirement plans are not all the same and are not all drafted with identical force-out provisions. Plan sponsors should review their plan document and administrative procedures to determine:
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- Whether force-outs are permitted
- What force-out threshold is currently in effect
- Whether rollover contributions are excluded from the force-out calculation
- How distributions and automatic IRA rollovers are processed
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Your dedicated Plan Consultant can help determine whether your plan’s provisions are up-to-date and assist with establishing an annual process for identifying and distributing eligible accounts.
The Bottom Line
By proactively removing small-balance accounts from your plan, you can immediately reduce administrative expenses, minimize missing participant exposure, and simplify ongoing plan management. The result is a cleaner, more efficient plan that works better for you and your participants.
