Plan Sponsors must follow the terms of their plan document and minimize extraneous costs and burdens to keep plan expenses low for all participants. Often, when participants change jobs or are separated from employment, they leave behind small plan balances that can become costly to administer. For that reason, plans are permitted to have what is commonly referred to as a “force out” or mandatory distribution provision to handle small plan balances of under $5,000.
As a plan participant, it’s important to pay attention to the vested account balance in your retirement plan after you separate from your employer. Your plan may allow you to leave your account in your former employer’s retirement plan, roll it over to an individual retirement account, or transfer it to your new employer’s retirement plan if that plan allows it. If you don’t choose one of those options, your former employer might select one for you, which may cause you to incur additional taxes if you are under age 59 ½.
What will happen to my account?
If your vested balance is greater than $5,000, you can leave your account in the plan. You may choose to do this because you prefer the investment choices offered by your former employer’s plan, or you may not know how to consolidate your retirement assets.
If your vested balance is equal to or greater than $1,000 and less than $5,000, you will receive a communication from Vestwell informing you that you have 45 days to move your assets to an Individual Retirement Act (“IRA”) of your choice. If you do not take any action, Vestwell will open an IRA on your behalf and transfer your assets out of the plan to that account. We will provide you with instructions about where and how to access the IRA.
If your vested balance is equal to or greater than $100 and less than $1,000, we will send you a message informing you that you have 45 days to move the assets on your own, and if no action is taken, we will send you a cash distribution as a check, less any applicable taxes and processing fees. Taxable distributions are subject to a mandatory IRS withholding of 20%.
Should your vested balance fall below $100, you will not receive a check. As stated in our fee disclosure notices available on your portal, Vestwell charges $100 for a force out distribution. Since your balance is less than $100, it is less expensive for you to forego your distribution. Therefore, you will not be receiving a distribution, and there is nothing further required of you at this time.
Why do I need to take a force out?
Pursuant to retirement plan regulations, your former employer may, in its discretion, force out any small balances of former employees.
What happens to the unvested balance of my account?
As described in our article "What Does Vesting Mean?", there may be balances from your employer matching that you have yet to vest in. Any unvested balances are forfeited when you have a Force Out distribution.
Will I be charged for a force out distribution?
Yes, you will be charged $100 for fees and costs associated with processing a force out distribution. A complete list of distribution-related fees can be found by going to the 'My Plan' tab on the Vestwell portal, select 'Investment Comparison Chart' navigate through the information where you will find specific details for fees and plan information.
If you have any questions please reach out to our Vestwell Advisors.