Terminating an employee is never easy, but can be necessary. When people leave your company—voluntarily or not—they take the value in their 401(k) plan with them to continue their retirement savings.
The catch: this doesn’t happen automatically.
After an employee’s last day, you no longer have a responsibility to add funds to their plan, but they still count toward your audit requirement for as long as they retain a balance in your plan.
It’s up to you to make sure they can access that balance.
The sooner they take control of it, the better.
Like a college roommate who leaves dirty socks scattered everywhere after moving out, terminated employees leave their mark on your 401(k) until you clean house. How to do that depends on their balance:
Total balance of $1,000 and under
With smaller balances, you can close the ex-employee’s account and send them a check. This is by far the easiest option, and you get confirmation as soon as they’ve taken possession of their funds.
$5,000 and under
With balances of $5,000 and under, you can force the ex-employee to move on without having to get their permission. This usually means moving their balance to an IRA.
Remember that you are required to give prompt notice to the former employee about their 401(k) balance. If you’ve tried issuing a check and they never receive or cash it, you have this option.
Balances greater than $5,000
You may have additional responsibilities if an employee with a high 401(k) balance departs. Ultimately, however, it’s their money. A 401(k) plan audit professional can help ensure you’re taking the necessary steps.
Former employees can be bitter, and might use delays in receiving funds as “evidence” of wrongdoing. Cover your bases by putting post-termination procedures in writing as part of your policy documents.
Contact Cassell Plan Audits to find out more today.
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