Force-outs, small balances, and where the money goes

Unclaimed Retirement Money Series · Post 3 of 6

Category: Retirement Plan Basics

When an employee leaves a company with a small vested retirement balance, the account may not remain in the employer’s plan indefinitely. Depending on the plan document, the balance, and the participant’s instructions, the money may be paid in cash, moved to an individual retirement account, or, under limited circumstances, transferred to a state unclaimed property fund.

For employers and HR professionals, the goal is not simply to remove small accounts. It is to document the process, communicate clearly, and verify that the money reaches an appropriate destination.

This checklist explains what a force-out is, how the $1,000 and $5,000 thresholds work, and what plan sponsors should review before and after a distribution.

What is a force-out?

A force-out is an involuntary distribution of a former employee’s small vested retirement account balance. The participant does not provide affirmative instructions, but the plan may still be permitted to distribute the account under the plan’s terms and applicable federal rules.

The process generally begins when:

  1. An employee leaves the company.
  2. The employee has a vested balance below the plan’s applicable force-out limit.
  3. The participant does not elect to leave the money in the plan, take a distribution, or complete a rollover.
  4. Required notices and administrative steps have been completed.
  5. The plan sponsor directs the recordkeeper or plan administrator to process the distribution.

The employer or plan sponsor establishes and oversees the process. The recordkeeper or plan administrator typically handles notices, tax reporting, check issuance, and any automatic rollover. The custodian receiving an automatic rollover then holds the money in an IRA for the participant.

A force-out is not the same as an employee choosing to withdraw money. It is a plan-initiated process allowed by the plan document and applicable law.

How the $1,000 and $5,000 thresholds work

The thresholds are easier to understand when separated into two questions:

  • How much is in the participant’s account?
  • What does the plan document permit?

Balances of $1,000 or less

Under the traditional small-balance rules discussed in GAO-15-73, published November 21, 2014, a plan may generally cash out a vested account balance of $1,000 or less if the plan permits involuntary distributions.

The money is usually paid by check, less any required tax withholding. The check may be sent to the participant’s last known address. If the participant deposits the check, the retirement plan distribution is complete.

If the check is not deposited or is returned as undeliverable, the plan has an additional administrative problem. The money may still belong to the participant, and the plan must follow its procedures for locating the participant and handling an uncashed check.

A plan should not assume that an uncashed check means the participant has given up the money.

Balances above $1,000 and up to $5,000

Under the $5,000 threshold addressed in GAO-15-73, a plan may generally force out a vested balance that is more than $1,000 but no more than $5,000 when the participant does not provide instructions.

The default destination is generally an automatic rollover IRA, not a check sent directly to the participant. The IRA is opened in the participant’s name, and the funds are transferred by the plan or its service provider.

The participant may later choose to:

  • Leave the money in the automatic rollover IRA.
  • Transfer it to another IRA.
  • Roll it into a new employer’s plan, if that plan accepts rollovers.
  • Request a cash distribution, subject to applicable tax rules.

The $5,000 figure is not a universal requirement that every plan must use. SECURE 2.0 permits a higher statutory maximum for mandatory cash-outs made after 2023, but a plan may retain a lower limit, including $5,000, or may choose not to conduct force-outs at all. The plan document, administrative procedures, and participant notices should be reviewed before any process is implemented.

A plan may not treat the threshold as a reason to distribute a larger balance without participant consent. If the account exceeds the plan’s permitted involuntary-distribution limit, the participant generally must make the election.

What happens to the money after a force-out?

The destination depends on the balance, the participant’s instructions, and the plan’s procedures.

1. Cash distribution

A participant may choose to receive the money directly, or the plan may issue a check for a qualifying balance when the plan’s terms permit it.

Practical consequences may include:

  • The distribution may be included in taxable income.
  • Federal and state withholding may apply.
  • An additional tax may apply in some cases if the participant is below the applicable retirement age.
  • The money is no longer held in a tax-deferred retirement account.
  • The participant may spend the money rather than preserve it for retirement.

A cash distribution may be useful in some circumstances, but it can reduce retirement savings and create a tax obligation. Participants should direct tax questions to their own tax professional.

2. Direct rollover to an IRA

For a balance above the plan’s cash-out ceiling and within the applicable force-out range, the default destination is generally an automatic rollover IRA when the participant does not provide instructions.

A direct rollover generally preserves tax-deferred treatment, but the participant should understand that:

  • The IRA may have account, administration, or investment-related fees.
  • The default investment may be conservative and may not match the participant’s long-term objectives.
  • The IRA may be difficult to track if the participant changes addresses or jobs.
  • The participant remains responsible for reviewing and managing the account or obtaining appropriate assistance.

The automatic rollover IRA is not a lost account by definition. It becomes vulnerable to being overlooked when the participant does not receive notices, changes addresses, or has several small retirement accounts.

3. Transfer to a state unclaimed property fund

The Department of Labor’s Field Assistance Bulletin 2025-01, issued January 14, 2025, provides a temporary enforcement policy for certain transfers of small missing-participant or missing-beneficiary balances of $1,000 or less to eligible state unclaimed property funds.

This is an option for a plan fiduciary, not an automatic requirement and not a substitute for a prudent search process. The bulletin generally requires the plan to:

  • Make a reasonable effort to locate the participant or beneficiary.
  • Determine that the state fund is a prudent destination.
  • Transfer the money to the state associated with the individual’s last known address.
  • Confirm that the state fund meets the bulletin’s requirements.
  • Provide appropriate information in the plan’s summary plan description or other required communications.

The bulletin also states that participants, beneficiaries, and heirs retain the right to claim the funds. Heirs of deceased participants are treated as owners with a right to claim, subject to the state’s claim procedures and documentation requirements.

A transfer to a state fund does not mean the money becomes the state’s unrestricted property. An eligible fund must hold the money for the benefit of the owner and qualifying heirs, allow claims without a time limit, and avoid fees that reduce the benefit.

What the scale means for plan sponsors

A July 2025 estimate from Capitalize and the Center for Retirement Research at Boston College found approximately 31.9 million forgotten 401(k) accounts holding more than $2.1 trillion, with an average balance of about $66,691, up roughly 30% from mid-2023.

These estimates are not a government count, but they illustrate why a force-out process should be treated as an ongoing compliance and communication responsibility rather than a one-time cleanup project.

Employer and HR checklist

Before the force-out

  1. Review the plan document.
    Confirm whether the plan permits involuntary distributions and identify the applicable dollar limit.

  2. Confirm how the balance is calculated.
    Verify whether the calculation includes rollover contributions, outstanding loans, and other items under the plan’s rules.

  3. Review the service agreement.
    Identify which party prepares notices, issues checks, opens automatic rollover IRAs, handles tax reporting, and monitors returned mail.

  4. Check current contact information.
    Use permitted information from employment records, payroll files, benefits records, and other approved sources to improve the chance of reaching the former employee.

  5. Document the search process.
    Keep records of addresses reviewed, notices sent, returned mail, search methods, dates, and decisions made.

  6. Confirm participant notices.
    Notices should clearly explain the available choices, the default outcome, the expected tax treatment, deadlines, fees, and whom to contact.

At the time of distribution

  1. Separate the three possible destinations.
    Explain the difference between cash, a rollover IRA, and a possible state unclaimed property transfer.

  2. Do not describe the default as a recommendation.
    The automatic destination is a plan process. It does not necessarily represent the participant’s best long-term choice.

  3. Use accurate, plain language.
    Avoid implying that a participant has forfeited the account simply because a check was not cashed or a notice was not answered.

  4. Coordinate with the recordkeeper.
    Confirm the distribution date, amount, destination, tax reporting, and treatment of returned checks.

After the force-out

  1. Reconcile the distribution.
    Compare plan records with the recordkeeper’s report, IRA transfer confirmation, check status, or state-fund documentation.

  2. Track returned and uncashed checks.
    Establish a documented process for follow-up, searches, tax reporting questions, and escalation to counsel when needed.

  3. Monitor participant communications.
    Keep a record of returned mail, updated addresses, participant responses, and any later claim.

  4. Review fees and default investments.
    Confirm that the automatic rollover arrangement continues to operate as described in the plan’s disclosures and service agreement.

  5. Evaluate the process periodically.
    Review error rates, returned mail, participant complaints, state-fund transfers, and changes in federal or state requirements.

Final considerations for employers

Small balances can become difficult to locate when a former employee changes jobs, moves, changes a name, or does not recognize the name of the IRA custodian. A careful force-out process protects the plan by creating a clear record and protects participants by giving them understandable information about where their money may go.

Navigant Advisory Group LLC provides financial education and does not provide individualized investment, tax, or legal advice. Navigant is not a recordkeeper, custodian, or investment manager. Direct legal and plan-specific questions to your plan administrator or ERISA counsel. Participants should consult their own tax professional before choosing a cash distribution or rollover.

For additional retirement education, visit Navigant’s Retirement Resource Center or contact Navigant Advisory Group with general questions.

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