Involuntary Distribution: What It Means and What to Do
A former employer can move small retirement balances from their plan. Understand what this involuntary process means and how to manage your options wisely.
An involuntary distribution, or “force-out,” occurs when a former employer removes a small account balance from their retirement plan after an employee has left. This is a common practice used to manage plan administration. If you receive a notice about this, it means your previous employer is using a provision in their retirement plan to close your account, an action that is legal and follows government regulations.
The Plan Sponsor’s Cash-Out Provision
Plan sponsors (former employers) can initiate these distributions to reduce administrative burdens, such as the costs of recordkeeping and mailing notices for former employees with small balances. The Department of Labor sets the rules for this action based on the vested account balance.
For balances under $1,000, a plan sponsor can mail a check directly to the former employee. For balances between $1,000 and $7,000, the rules are different. The SECURE 2.0 Act increased this upper limit from $5,000. If your balance is in this range and you do not provide direction, the plan sponsor must roll the funds into a Safe Harbor Individual Retirement Account (IRA) for you.
This automatic rollover is a protective measure that preserves the tax-deferred status of your savings. The plan sponsor chooses the financial institution for the new IRA. The thresholds are based on the total vested amount in your account at the time of the distribution.
Understanding the Distribution Notice
Before any funds are moved, the plan administrator must send you an official written notice outlining the process. This document will state that your account is subject to an involuntary distribution and explain what happens if you do not make a choice. The notice specifies the value of your vested account balance and the date by which you must act, which is usually 30 to 60 days.
The communication details all available options, such as rolling the funds into another retirement account or receiving a cash payment. For balances over $1,000 that are subject to a default rollover, the notice must also provide information about the IRA that will be established for you. This includes the name of the financial institution and details on any associated fees.
The notice will also include a special tax notice explaining the tax consequences of your choices. Reviewing this document is the first step in making an informed decision about your savings.
Recipient Options and Tax Implications
Upon receiving a distribution notice, you have three options with distinct financial consequences. The first is to proactively roll over the funds. You can direct the plan administrator to move the money to another qualified retirement account, like a 401(k) with a new employer or a personal IRA. This trustee-to-trustee transfer is a non-taxable event, allowing your savings to remain tax-deferred.
A second choice is to take the cash distribution. The plan administrator will send you a check for your vested balance, minus a mandatory 20% federal tax withholding. This distribution is considered ordinary income and will be taxed accordingly. If you are under age 59½, you will generally also face a 10% early withdrawal penalty.
The final option is to do nothing and allow the default action to proceed. Depending on your balance, this will result in either a forced cash-out by check or an automatic rollover into a Safe Harbor IRA. While an automatic rollover preserves the tax-deferred status of the money, these default IRAs may have higher administrative fees or be invested in conservative, low-yield funds that may not align with your financial goals.
Locating a Default Rollover IRA
If your funds were moved to a Safe Harbor IRA because you did not respond to a distribution notice, you will need to locate the account. The first step is to contact your former employer’s human resources or benefits department. They must keep records of where they sent the funds and can provide the financial institution’s contact information.
If you cannot reach your former employer, you can search the Department of Labor’s Retirement Savings Lost and Found database. This online portal was launched in late 2024 to help people locate retirement accounts from former employers. Other resources include the National Registry of Unclaimed Retirement Benefits and the DOL’s database for abandoned plans.
Once you locate the IRA, you are not obligated to keep it there. You can initiate a trustee-to-trustee transfer to move the funds into an IRA of your choosing. This allows you to select an account with lower fees and investment options that better suit your retirement strategy.