Long-term plans or businesses that operate in a high turn-over industry can end up with a significant number of former employees that still have accounts under the plan – often with low balances.

Because participant accounts remain open under your plan as long as they have a balance, it can cause administrative issues and added expenses related to required notifications and possible plan audits for Form 5500 purposes.

Luckily, the IRS allows employers to add what’s known as a force-out provision that allows you to force former employees with low balances to remove their assets from the plan. Here’s what you should know about force-out provisions and when they apply.
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A force-out provision is a clause that can be added to your Guideline 401(k) plan document that would require the assets of dismissed participants with balances below a certain threshold to remove the funds from your 401(k) plan or they will be rolled over to an IRA in their name. The minimum amount required can be from $1,000 to $5,000¹ (not including rolled over amounts), depending on the option you select for the plan.

If this occurs, an affected participant will receive a force-out notice letting them know the date the force out will take place (which will occur at least 30 days after the notice is provided). If the participant does not take action to rollover or distribute the funds from your plan, they will automatically rollover to a Guideline IRA in their name. Once the rollover is complete, the assets will no longer be considered plan assets and the former employee will have complete control over the IRA, once they claim it.
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Force-out rules can be beneficial for plan sponsors for a few reasons. One primary benefit is that they may help plans avoid annual audits for Form 5500, which can be costly. Form 5500 audits are often required for plans with more than 100 participants (both terminated and currently employed) with a balance in the plan. By forcing out former employees to an IRA, the plan sponsor can potentially avoid an expensive audit and participants can continue to save for retirement while possibly paying lower fees. Please note, however, that offering a force-out provision does not guarantee your plan will not require a Form 5500 plan audit.

Another benefit of force-outs is that they may help reduce administrative burdens for plan sponsors. This is because participants – including those who are no longer employees – must still receive all required plan notices and disclosures. As a result, if Guideline cannot contact these participants on your behalf, then you may be required to reach out to them yourself.
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Dismissed participants who do not meet the balance threshold to keep their account under your plan will be given 30 days following service termination to distribute or roll over their balance before being subject to the force-out provision.

You will also receive an email 3 business days prior to the force-out date to let you know who will be affected. Force outs happen on the 20th of every month.

Because participant must be notified before a force out can take place, and IRAs must be established for those who fail to provide direction, it is vitally important that if you chose to include a force-out provision in your plan, that you keep all census data up to date and timely respond to any requests for further information on affected former employees. Missing information can mean that a former employee cannot be forced out and inconsistent application of the provision can affect the qualified status of your plan.
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If participants do not want their 401(k) balance forced into a Guideline IRA, they must distribute or roll their funds out of the plan prior to the force-out date.

All participants who do not meet the balance requirement will be forced out. You will not be able to select which employees are forced out manually. Participants with account balances over the force-out limit must be allowed to keep their assets in the plan even after they no longer work for you.

¹ While the law allows for a forceout level up to $7,000, Guideline only supports forceout provisions up to $5,000 at this time.
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