With the passage of SECURE 2.0, there were near 100 updates to retirement plans. One that is quite welcome is an increase in the Involuntary Cash Out limit from $5,000 to $7,000, which was available as of December 29, 2023. This means that if a Plan Sponsor wanted to cash out terminated participants with less than $7,000 vested in their plan, it would be possible to do so. Depending on the Plan Document provisions Rollovers may or may not be included in this total.

If a Plan Sponsor wants to update their provisions to allow for the $7,000 increase, first contact your current TPA. More than likely, they will add this to a checklist that will become part of an amendment slated to be adopted sometime in 2025 to retroactively amend for several SECURE 2.0 provisions. Next, the TPA will need to contact the recordkeeper so that they are aware of the change, too.

Depending on the recordkeeper’s programs, Involuntary Cash Outs might be an automated process or a manual process. If automated, it’s a best practice that the Plan Sponsor has a routine to update Dates of Termination in the recordkeeper’s system, which would then trigger the process. If manual, the Plan Sponsor can reach out to the TPA or recordkeeper to pull a list of participants that could be cashed out, then send notification to the participants (generally, a letter, Distribution Election Form and Special Tax Notice) to request a distribution before the date of the Involuntary Cash Out. If no response within time (30-180 days), then the participant can be forced out. Participants with less than $1,000 vested would receive a cash from the recordkeeper; those between $1,000 to $7,000 (if increasing the limit), would have the assets rolled over to an IRA selected by the Plan Sponsor. From there, the participant has the same portability options as any IRA.