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  • Writer's pictureCRI TPA Services

Maximize the Benefits of Mandatory Cash-Out Options

As part of the ongoing administration and management of qualified plans, the concept of mandatory cash-out options assumes a critical role. These provisions allow Plan Sponsors to distribute the vested account balance of a terminated participant if it is below certain dollar amounts. Examining the advantages and benefits of the mandatory cash-out rules within retirement plans will help Plan Sponsors understand how to optimize plan management and reduce costs.


Reducing Plan Expenses and Participant Fees

One of the foremost advantages of implementing mandatory cash-out options is the reduction of plan expenses and participant fees. Typically, service providers charge fees based on the number of participants with an account balance. By promptly distributing funds to terminated participants, especially those with vested balances less than $7,000, Plan Sponsors can trim down these expenses, ultimately benefiting both the plan and its participants.


Mitigating the Burden of Large Plan Audits

For plans with over 100 participants at the beginning of the year, a mandatory large plan audit, requiring an independent CPA, becomes a necessity. However, judicious use of mandatory cash-outs can help avoid this costly audit. By paying out the balances of terminated participants with less than $7,000, Plan Sponsors can potentially keep the participant count below the 100-mark threshold, consequently sparing the plan from the expenses associated with a large plan audit.


Addressing the Issue of "Lost Participants"

The issue of "lost participants" is a common challenge in retirement plans. When participants leave a company, they often neglect to update their contact information with the plan administrator. As time passes, participants move or change their contact details, making it challenging to provide them with notifications and required disclosures. Mandatory cash-outs can eliminate this issue by distributing funds to terminated participants after they incur a severance of employment. This proactive approach helps the employer reduce its liability concerning small balances of former employees and ensures that participants receive their entitled funds.


Details of Mandatory Cash-Out Options

To fully leverage mandatory cash-out options, it is essential to understand the specific provisions based on vested balances:

  • Vested Balance less than $200: Plan Sponsors can instruct the investment company to issue payment to the participant at their last known address without notice and without consent.

  • Vested Balance $201 - $1,000: In this scenario, Plan Sponsors must provide terminated participants with notification of their right to rollover their balance into another plan or an IRA. If the participant fails to make the election within 60 days, the Plan Sponsor will direct the investment company to issue payment to the participant, less federal withholding, and deliver the funds to the participant's last known address.

  • Vested Balance $1,001 - $7,000: For balances falling within this range, Plan Sponsors must again notify terminated participants of their rollover options. If no election is made within 60 days, the Plan Sponsor will direct the investment company to automatically rollover the vested balance into an IRA established in the participant's name with an IRA company chosen by the Plan Sponsor.

Please be sure to read and follow your Plan Document provisions on mandatory cash-out procedures. Each plan will contain specific options and the details outlined above may not apply for every plan.


Consultation With Your TPA

To determine the mandatory cash-out provisions for your retirement plan, it is strongly advised to consult with your Third-Party Administrator (TPA). They possess the expertise and insights necessary to advise you regarding the best approach for your organization and will help you with the implementation and administration.


Mandatory Cash-Out Options

Mandatory cash-out options present a valuable tool for optimizing the management of retirement plans. They offer a means to reduce expenses, mitigate the need for large plan audits, and address the challenge of "lost participants." To unlock these benefits, Plan Sponsors should carefully consider their plan's provisions and consult with their TPA to make informed decisions. By doing so, they can ensure the efficient operation of their retirement plans while safeguarding the financial well-being of their participants.


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