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Cash Out Limit is Movin' On Up

Carter Kimball 10/17/23


SECURE 2.0 has made a long-overdue increase to the mandatory distribution limit from $5,000 to $7,000, beginning with the 2024 plan year.  This limit (which is also referred to as the force-out limit or the involuntary cash-out limit) has been around for decades.  It was set at $3,500 for years before it increased to $5,000 in 1997.  Yes, you read that correctly…it hasn’t changed in 25 years, despite the fact that most of the other limits we deal with have more than doubled over those same years.  Unfortunately, the cash-out limit is still static and not indexed for inflation, but we will take what we can get here.

As a quick recap, these rules allow sponsors to force terminated participants with remaining vested balances below the cash-out limit to take distributions from the plan, thus absolving plan sponsors of the responsibilities and associated costs of maintaining those plan accounts.  We provide a more detailed description here.

Although this may not sound as exciting as some of the other S2 changes (we use the term ‘exciting’ loosely here), the new limit could translate to cost savings for many plan sponsors.

Here are a few ways how:

Large-Plan Filer Status

Generally, plans with more than 100 participants as of the first day of the plan year must undergo an independent audit (see our article here for exact specifications).  In February of this year, the Department of Labor changed the participant counting method used to determine whether a plan must be audited.  In past years, the count included all eligible participants, (even if not contributing).  Starting with the 2023 plan year, the new rules require that only participants with actual account balances be included.

Employers who are right on the cusp of requiring an audit will want to be especially vigilant of their participant count.  This new rule, coupled with the increased cash-out threshold, may allow some employers to remain below audit territory or even eliminate the need for an audit altogether…an annual savings that could run into 5 figures.  No one wants to find they needlessly spent that kind of money over a handful of small balances that could have been forced out of the plan.

Participant Fees

Many plan service providers, such as TPAs and recordkeepers, base their fees (at least partially) on the number of participants with balances.  Being able to cash-out more participants with smaller balances directly translates into a reduction in the associated fees.

Form 8955-SSA

The IRS requires plan sponsors to file Form 8955-SSA to report former employees who still have balances in the plan for more than a year after the employee leaves.  Cashing out small balances when employees terminate employment lessens the likelihood of needing to file this form each year.  Though not a big-ticket item in terms of preparation cost, every little bit helps.

The New DOL Lost & Found

As part of S2, Congress instructed the Department of Labor to create an online “Lost and Found” database for retirement accounts.  The database, slated to go live in 2025, will require sponsors to report accounts of “lost” former employees.  That, in turn, will allow employees to “find” forgotten retirement balances with former employees of days gone by.  Many in the industry have been asking for something like this for years, and it is certainly hard to argue against reuniting participants with their retirement accounts as a positive.  That being said, plan sponsors with a bunch of old balances should count on an influx of inquiries from former employees when the database goes live.  To avoid (or at least minimize) this deluge, sponsors can use the increased cash-out limit to remove as many of these small balances as possible in the meantime.

 Companies that wish to take advantage of the new cash-out limit can operationally do so as of the first day of the 2024 plan year (January 1, 2024 for those that operate on a calendar year basis); however, plan amendments will be required to reflect the change no later than the end of 2025.

For more information, please visit our SECURE 2.0 Act Resource Page.

Topics: 401(k) Plan, Legislation, Form 5500, Form 8955-SSA, IQPA Audit, Plan Distributions, Mandatory Distribution, Force Out, SECURE 2.0


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.