It’s 2024, which means a new batch of provisions from SECURE Act 2.0 have gone into effect. One of the more significant ones is an increase in the “cashout” limit that a qualified plan can impose to kick former employees with small balances out of their plans.

The cashout limit allows a qualified plan to force a distribution of the accrued benefit of a participant whose account balance is below a certain threshold stated in the Internal Revenue Code. You don’t need the participant to make an election or otherwise consent to the distribution; you just have to give them a reasonable period to make an election as to how they want to receive the benefit. If they don’t respond, the plan ships out the benefit. If the value of the forced distribution is over $1,000 and the participant doesn’t elect how to receive the benefit, the distribution must go into an IRA established for the participant – and it isn’t hard for a plan to find a service provider who will be happy to set up those IRAs.

For a while, this limit was $3,500 and was increased to $5,000 by the Taxpayer Relief Act of 1997. The final regulations for this increase became effective October 17, 2000. SECURE Act 2.0 bumps it up to $7,000 as of January 1, 2024. Plans aren’t required to have a force-out provision, but nearly all do, and for good reason.

It’s hard to imagine a scenario where it wouldn’t be smart for a plan to take advantage of the increased limit. Here are the main reasons why:

  • The IRS and DOL have made it known to plan sponsors that it’s important for them to do their best to keep track of terminated employees so those participants can ultimately get the benefits they’ve earned. The more participants you can drop, the fewer participants you have to worry about losing.
  • Plans with 100 or more participants (generally, it’s 100; the rules are a little more complex than that) with account balances at the start of the plan year must be audited by an independent CPA firm. While I’m one of the first people who will tell you that good auditors provide value and can catch a lot of operational errors before they snowball into bigger problems, they aren’t cheap. Sponsors on the borderline of needing an audit usually want to avoid the cost if they can, so removing more account balances might get the plan under the limit.
  • For bigger plans that are more likely to be the target of a class action lawsuit, removing participants can reduce the leverage that a participant class can have, even if the claims aren’t all that strong. Once a class action is filed, it’s largely a numbers game.
  • If the plan’s third-party administrator charges a fee based on the number of participants, reducing the plan’s headcount naturally reduces that fee.
  • Distributing the balance of a participant who isn’t 100% vested allows the non-vested amounts to be moved into the plan’s forfeiture account, and those amounts can pay plan expenses, offset contributions, or be reallocated to other employees.
  • For ESOPs (sorry, I had to get in something specific to ESOPs), forcing out a participant’s balance earlier can help control the plan’s repurchase liability, assuming that the value of the stock will increase. It’s generally less expensive to buy out the stock earlier. Plus, if shares are forfeited, they can be allocated to other employees, and having enough shares to allocate to current employees can become more of a struggle as an ESOP matures.

Recent guidance extended the required amendment adoption date to December 31, 2026, for many SECURE 2.0 provisions, including this increase to the cashout threshold. Plan sponsors wanting to use the higher threshold may do so while waiting to adopt an amendment. Those inclined to increase their cashout level should discuss the change process with their third-party administrators before taking any action themselves.

The Jackson Lewis Employee Benefits Practice Group members can assist plan sponsors in understanding and putting the requirements of SECURE 2.0 into practice. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

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Photo of M. John Burgess M. John Burgess

A certified public accountant and attorney with an extensive tax and accounting background including experience as an auditor with a large accounting firm, John brings a practical approach to the legal counsel he provides to employee benefit plan committees, including 401(k) plan committees…

A certified public accountant and attorney with an extensive tax and accounting background including experience as an auditor with a large accounting firm, John brings a practical approach to the legal counsel he provides to employee benefit plan committees, including 401(k) plan committees, regarding their fiduciary responsibilities. Clients appreciate his ability to provide a comprehensive view of their specific benefit plans and how they affect their business. Business owners and executives leverage John’s nearly 20 years of experience in employee benefits, executive compensation matters, and employee stock ownership plans (ESOPs). John regularly represents clients before the Internal Revenue Service (IRS) and department of Labor (DOL) in benefits matters.

A significant portion of John’s practice is centered on establishing and maintaining ESOPs for a nationwide client base, including plan design, distribution policies, the structure and implementation of ESOP transactions and administration matters. John also regularly represents ESOP trustees in purchase and sale transactions. In 2020, he helped to establish the Florida Center for Employee Ownership, a statewide resource for business owners who are considering a transition of the ownership of a business to its employees and is a member of its Board of Directors. He speaks regularly on ESOP issues at national and regional conferences.

John plays a critical role in navigating the complex and potentially risky issues that can arise during an M&A transaction. Clients draw on his benefits issues experience, including assistance with the due diligence on benefit plans sponsored by an acquired company. He routinely counsels clients on plan documentation, plan qualification, and other benefits issues, including tax and fiduciary matters.

Having worked with plans of all sizes, ranging from those sponsored by small, local companies to large, multi-national corporations, John has guided business owners, executives, and other senior managers with a range of employee benefits. Employers at all stages, from startups to public companies, seek John for advice and counsel on how to establish and maintain equity-based compensation programs for executives and employees.

Clients value John’s significant experience assisting in the correction of errors in both qualified and non-qualified retirement plans. This includes representing clients in Voluntary Compliance Program applications before the IRS, providing the opportunity to maintain compliance with IRS regulations and the potential for saving significant penalties and fees. He regularly assists clients with executive employment agreements, severance agreements, change in control agreements and non-qualified deferred compensation plans, including compliance with Internal Revenue Code Sections 409A, 457(b) and 457(f).