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What to do with terminated employees in your 401(k) plan

What to do with terminated employees in your 401(k) plan

Just because an employee is no longer with your organization, it doesn’t mean that your fiduciary responsibilities are complete.  If your former employee leaves a 401(k) balance in your plan, you and the company are still required to look after it.  One of the many reasons to keep an eye on terminated employees with balances is that they count towards “eligible participants” when determining if your plan is to be considered a “large plan” that requires an audit.

Fortunately, there are some things you can do to reduce participant count related to balances of terminated employees:

  • If a terminated employee has a balance of $5,000 or less, you may be able to force them out of the plan. This ability needs to be allowed in your plan document, but it is a relatively easy amendment if it’s not allowed currently.  After a 30-day written notice to the terminated employee, your TPA & recordkeeper will coordinate the roll out of the balance from your plan.  When this occurs, the terminated employee’s savings are automatically rolled into an IRA in their name.  The IRA provider notifies the employee about the transfer and how to access their new account.
  • If a terminated employee has a balance greater than $5,000, you can’t directly force them out of your plan. Instead, you can start an outreach program to the terminated participant to encourage them to review their options.  The outreach program can include calling them, sending letters, and providing additional information about their options of rolling out or remaining in the plan.

An issue we often see is that the contact information for terminated employees becomes stale.  People move, change phone numbers, and change jobs.  We recommend making clear employees’ options with regard to their 401(k) savings at the time they leave the company.  You should also remind them to update contact information if things change in the future.

If you are unable to contact a terminated employee, the Department of Labor has issued some guidelines to help companies understand their responsibilities.  The four steps recommended by the Department of Labor include:

  • Use certified mail and retain documentation that the terminated employee is no longer at the address of record.
  • Review other records for contact information, including human resource files, healthcare (COBRA) info, or unemployment records.
  • Contacting the terminated employee’s designated beneficiary on file and seeing if they can put you in touch.
  • Utilizing free search options online or utilizing any no-cost search features of your TPA and Recordkeeper.

If all else fails, a commercial locator service, which can be paid from the participant’s investment balance, may be used to find a participant.  The plan sponsor is still required to monitor the service provider and determine if the cost is reasonable relative to participant’s balance.

Managing terminated employees in your retirement plan can go a long way to reducing time and expense in overseeing your plan.  We believe it is a best practice to review terminated employee balances at least annually and having procedures in place to make plan administration as efficient as possible.