Rules change on low-balance
A new federal rule protects
employees who leave behind a low-balance 401(k) when they quit working
for a company.
Many workers neglect
their 401(k)s when they change jobs or simply leave the company.
Sometimes it's because they like the plan and think the money will grow; sometimes
it's because they don't know what to do with it.
federal rules, accounts with a balance of less than $5,000 could be cashed out
if the former employee didn't provide instructions on what to do with the account.
The new law says that accounts with a balance of $1,000 to $5,000 must be rolled
over to a safe harbor account -- an IRA.
The accounts would
be designed "to minimize risk, preserve assets for retirement and maintain
liquidity," according to the U.S. Department of Labor. The labor department
recommends funneling the money into money market funds, interest-bearing savings
accounts and certificates of deposit.
to know that this is their account," says Rick Meigs, president of 401khelpcenter.com,
"that they have the right to the money and can do anything they want with
the account just as if they set it up themselves.
by definition, most of them aren't going to know that it exists. By definition
it's only set up where the plan sponsor is unable to locate the plan participant
or where the participant fails to respond."
a balance of less than $1,000 can be cashed out by the employer if the participant
is located. The check will be minus 20 percent in federal taxes, with more due
at tax time if the individual is in a higher tax bracket. In addition, any taxable
portion not rolled over may be subject to a 10-percent IRS penalty. And, state
taxes may be due. If a participant can't be located, the money would stay in the
401(k) and, likely, be eaten up by fees pretty quickly.
says he suspects that a lot of companies will simply allow balances as low as
$1,000 to stay in the 401(k).
two approaches. Companies can set up these accounts and roll over the small-balances
in accordance with the regulations, or they can amend their plan. There's no magic
about $5,000. The rule changes the amount they can distribute to $1,000. They
can just leave (balances above that) in the 401(k). Don't take any
steps to distribute it; don't search for the person."
you leave a 401(k) behind and receive a check minus the 20-percent
tax withholding, there's a way to correct the situation if you want to put the
money in an IRA and be credited for rolling over your entire 401(k)
If you can come up with the 20 percent, use that plus
the check you received from your former employer to open an IRA. The 20 percent
that was initially deducted will be credited toward your tax bill at the end of
the year. This has to be done within 60 days of receiving the check.
the best advice is to ask your employer for a distribution form when you're about
to leave a company. Make your wishes known at that time about how you want your
401(k) to be handled.