Simplifying Small Balance Rollovers
Many plan sponsors use checks for force-out distributions under $1,000 without realizing there's a better way. Using checks can create fiduciary and tax issues, as uncashed checks remain plan assets, leading to ongoing responsibilities to find missing participants.
Fiduciary Risk
Fiduciaries must resolve uncashed checks and locate missing participants. Uncashed checks, still plan assets, pose risks such as:
- Violating the duty to act prudently if participants aren’t located.
- Loss of earnings from participant-directed investments.
- Lack of notices or statements to participants.
- Increasing the chance of a Department of Labor (DOL) investigation.
Solution: Automatic Rollover IRAs
Using automatic rollover IRAs for force-outs below $1,000 mitigates these risks. The funds are no longer plan assets, reducing fiduciary responsibility. It also aligns with DOL guidance, allowing use of the participant’s last known address, satisfying notice requirements even if undeliverable.
Locating Missing Participants
Uncashed checks often indicate missing participants. The DOL recommends several methods to find them, such as:
- Checking plan and employer records.
- Contacting beneficiaries and emergency contacts.
- Using online searches, commercial locator services, or certified mail.
- Registering participants on pension registries.
Automatic rollover IRAs simplify this by reducing the need for exhaustive searches for small balances.
Tax Consequences
Force-outs via cash distribution can lead to unwanted taxable income and penalties for participants. For example, a participant with an $800 account balance could face immediate taxation and a 10% penalty if they don’t cash the check promptly. Using an automatic rollover IRA avoids this by deferring taxes until the participant chooses to take a distribution.
Optimizing the plan’s automatic rollover IRA feature reduces fiduciary risk and avoids unnecessary tax consequences for participants. This strategy is especially important as SECURE 2.0 changes increase the likelihood of small balances being left behind. Adopting automatic rollovers ensures better outcomes for both plan sponsors and participants.
