Benefit Plan Insights: 5 Reasons to Leverage SECURE 2.0 Act’s Cashout Limit Change

By Rachel Gonner, CPA, CPP, Business Assurance & Advisory Services Manager

Benefit Plan Insights: 5 Reasons to Leverage SECURE 2.0 Act’s Cashout Limit Change

SECURE 2.0 Act rule change increases benefit plan cashout limit

The SECURE 2.0 Act of 2022 (The Act) adds a multitude of changes with varied effective dates for plan administrators. One such change is Section 304, which increases the mandatory distribution limit from $5,000 to $7,000, effective January 1, 2024.

Cashout rule overview

The cashout rule allows a qualified plan to force former employees with low balances to exit the plan. Initially, the limit at which the cashout rule could be imposed was set at $3,500, before increasing to $5,000 in 1997. This limit stuck for 25 years, despite inflation! Finally, effective January 1, 2024, The Act increased the limit, allowing a plan to force a distribution of participant account balances below $7,000 and providing strategic opportunities for plan sponsors to streamline their participant base.

Five reasons benefit plan administrators should embrace the cashout increase

1. Efficient participant management

The Internal Revenue Service (IRS) and Department of Labor (DOL) emphasize the importance of tracking terminated employees for the timely distribution of benefits. In response to the Act, Congress mandated the DOL to establish an online “Lost and Found” database for retirement accounts, set to launch in 2025, compelling plan sponsors to report “lost” former employee accounts. This initiative aims to reunite individuals with forgotten retirement balances, a longstanding industry request. With a surge in inquiries expected when the database activates, plan sponsors can preemptively use the heightened cashout limit to reduce these small balances before the influx begins. Additionally, as a continuing requirement, Form 8955-SSA must be filed for participants who are terminated for over one year and still have balances. Leveraging the increased cashout limit allows plan sponsors to efficiently manage their participant pool, reducing the administrative burden associated with maintaining small balances.

2. Audit cost savings—”Large Plan” vs. “Small Plan” status

Plans exceeding 100 participants (considered “large plans”) at the start of the plan year typically face mandatory independent audits, as opposed to “small plans”. The DOL modified the participant counting methods for plan years beginning on or after January 1, 2023. Formerly encompassing all eligible participants, the new regulations effective for the 2023 plan year onwards mandate the inclusion of only participants with actual account balances at the beginning of the year. Despite the acknowledged value auditors bring in identifying operational errors early on, the associated costs often deter plan sponsors teetering on the audit threshold. This prompts a strategic approach as plan sponsors in this position can benefit from increased vigilance. By adhering to the updated rules that minimize account balances, plan sponsors might stave off audits, resulting in substantial annual savings.

3. Fee reductions for TPAs

Plans subject to third-party administrator fees based on participant numbers can enjoy direct cost reductions by leveraging the cashout increase. A streamlined participant count translates into tangible savings, making it a prudent financial decision for plan sponsors.

4. Unlocking non-vested balances

Distributing the balance of a non-100% vested participant allows the non-vested amounts to be redirected for various purposes, including plan expenses, offsetting contributions, or reallocating funds to other employees, in accordance with plan provisions.

5. Mitigating class action risks

Bigger plans often become targets for class action lawsuits. The reduction of participants, even if their claims are weak, can diminish the leverage a participant class holds. It becomes a proactive strategy to navigate the legal landscape with prudence.

Action Items

Plan sponsors eager to embrace the benefits of the increased cashout limit should note the recent guidance extending the required amendment adoption date to December 31, 2026, for most plans, with immediate implementation allowed. Plan sponsors looking to capitalize on the enhanced cashout limit under the Act can take strategic steps to maximize its advantages:

  • Engage in prudent discussions with third-party administrators before taking any irreversible actions.
  • Examine the quantity and balances of former participants, actively seek out, identify, and initiate the forced distribution of individuals with balances below $7,000.
  • For 5500 reporting (and determining audit requirements), consider only the active participants with an account balance in the plan at the start of the plan year.
  • Amend plan documents to reflect the cashout limit change by December 31, 2026.

These action items serve as a roadmap for plan sponsors to navigate the nuances of the increased cashout limit effectively. By incorporating these steps into their strategy, plan sponsors can align their practices with the evolving landscape of retirement planning, ensuring optimal participant management and cost efficiency.

Conclusion

As we navigate the evolving landscape of retirement planning, the SECURE 2.0 Act’s adjustments offer a strategic opportunity for plan sponsors to optimize their participant base, reduce costs, and enhance overall plan efficiency. By seizing the potential afforded by the increased cashout limit, administrators can pave the way for a more robust and sustainable retirement plan.

Your Keiter Opportunity Advisors will continue to keep you updated on new and changing regulations that may impact your business’s retirement plan.

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About the Author


Rachel Gonner

Rachel Gonner, CPA, CPP, Business Assurance & Advisory Services Manager

Rachel is a Manager in Keiter’s Business Assurance and Advisory Services department. She brings a passion for providing superior value to her clients through the highest form of quality service. Understanding her clients’ organizational missions and providing tailored engagement services is paramount to her approach.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

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