May 3, 2025 | 3-4 Minute Read
As part of SECURE 2.0, the involuntary distribution threshold (also known as the force-out or mandatory cash-out limit) for retirement plans may be raised by plan sponsors from $5,000 to $7,000. This allows 401(k), 403(b), and governmental 457(b) plans to force-distribute account balances of participants who are no longer employed by the organization up to $7,000 without a participant’s or their spouse’s consent, after giving the individual notice and a chance to choose a payout option.
When it Became Effective
This provision is effective for distributions made after December 31, 2023.
Plan sponsors who wish to use the new limit will typically need to amend their plan document to reflect the $7,000 threshold. According to guidance from the IRS in Notice 2024-2, formal plan amendments for SECURE 2.0 provisions are due December 31, 2026 for most plans (2029 for governmental plans). In the meantime, the IRS has authorized reliance on its proposed guidance for implementing the $7,000 limit.
How it Works
Vested Participant accounts of $7,000 or less, but greater than $1,000 must be rolled into a Safe Harbor IRA (Independent Retirement Account). Vested Participant accounts of $1,000 or less may be paid in a single lump-sum. These rules are designed to protect participants by preserving their retirement savings (via automatic IRA rollovers for modest balances) while also relieving plans from the burden of maintaining very small, inactive accounts.
It’s worth noting that this force-out provision is permissive. Plans are not obliged to use a mandatory cash-out at all, and even those that do are not required to raise the limit. SECURE 2.0 simply permits plan sponsors to increase their cash-out threshold to $7,000 if they choose.
Advantages
One of the focuses of SECURE 2.0 was to entice employers to sponsor and maintain qualified employee retirement plans. Increasing the involuntary distribution threshold to $7,000 allows employers to reduce plan costs by moving the account of terminated employees with vested balances under $7,000 out of the plan and no longer having to pay any fees associated with those accounts, which are often covered by the employer.
For plans that are nearing the participants with a balance count audit threshold (see SECURE Act provides Audit Relief from the Department of Labor for Some Plans), this can also help save employers money by avoiding audit costs.
This provision can also alleviate the plan sponsor the burden of following the Department of Labor’s guidance seeking missing participants (please see Missing Participants Guidance)
Another aim of SECURE 2.0 is to improve Americans’ retirement readiness. Often, terminated employees with smaller balances cash out their balances, which can be a hinderance in the long run for sustained retirement savings. The increased Involuntary Cash-Out Limit can dramatically reduce “leakage” from the retirement system, i.e. money leaving the retirement savings system prior to retirement. Terminated participants who do not make an election and whose vested account balance is within the $1,000 to $7,000 window still have the opportunity for their balance to grow, but instead of in the employer’s plan, in an IRA.
Other Considerations
An additional option that some plan sponsors are considering is SECURE 2.0’s auto-portability provision. This provision automatically transfers a participant’s Safe Harbor IRA (from a prior plan’s force-out) into their new employer’s 401(k) plan when they change jobs, unless they opt out. The goal is to help workers consolidate their retirement savings and prevent cash-outs. For more information on this provision, please see our “SECURE 2.0 Auto-Portability Provision: Simplifying Retirement Account Transfers for Employees”
Benefits² Administrators clients: If you have questions about increasing your plan’s cash-out limit to $7,000, we encourage you to reach out to your dedicated Retirement Analyst to help you analyze the impact of this change on your plan’s demographics and goals and guide you through the adoption process.
For non-clients or plan advisors seeking guidance: If you’d like to learn more about SECURE 2.0’s force-out limit or any other plan provision, we invite you to contact Leslie Wood at lwood@benefits2llc.com for more information.
Our Benefits² Administrators team is here to help you navigate these new retirement plan rules and help keep your plan’s cost low and while encouraging participant retirement readiness success.
JP Perryman, QKA
Jeremiah “JP” Perryman, QKA is the Compliance and Operations Manager at Benefits² Administrators. He has more than 15 years of experience working with qualified retirement plans.