Dear HR Executive,
If your organization is like many others, you don’t like to hang on to the small balances in 401(k) accounts whose holders have left your employ.
In fact, you aren’t legally obliged to keep vested balances under $5,000. If you do, it can be expensive in terms of administrative cost.
Why is this an issue? You’d think that departing employees would have a plan for their 401(k) balances, but this isn’t always the case.
Static Assets
The evidence: Research from the Charles M. Schwab investment company indicates that 43% of 401(k) assets owned by people who left their jobs in the first three months of 2008 still hadn’t been moved a year later.
So what’s your duty to former employees who have left small balances in your 401(k) program that you want to clear out?
Under IRS rules, you have to inform them of their options – which include rolling the money into a new employer’s plan or an IRA, or taking a cash distribution. (The latter option isn’t terribly attractive, because it incurs an immediate 10% tax penalty and the distribution has to be reported as personal income.)
And the best way to inform them – the way that ensures your 401(k) will continue to pass muster with the IRS – has just changed.
New Notices
Recognizing legal changes over the past decade, the IRS has issued new model notices for departed employees who have either traditional 401(k) assets and/or so-called “Roth” – or post-tax – assets. There’s a different notice for each. (The IRS claims these new notices are also simpler.)
To be sure you’re in tax compliance, you may want to download the new notices from the IRS website.
Dave Clemens
Editor-in-Chief
HR Rapid Learning Center
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