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Ex-Employees: Gone, But Not Forgotten to the Plan

All that’s left from the going-away party are a few crumbs on the conference table and an errant streamer still hanging insistently from the ceiling in a corner. The honoree has left the company, but she’s not forgotten, especially by the retirement plan administrator — she may be off payroll, but she’s still a plan participant.

In “Is Keeping Former Employees in Your Plan a Good Idea?,” an entry in Belfint Lyons Shuman’s blog, Jorge Guerrero, CPA discusses the possibility that a former employee may fail to roll their funds out of the plan into one offered by their new employer or into an IRA, and what that can mean for the erstwhile employer who finds that she or he is not really out of their hair after all.

Former employees as plan participants are not simply a passing reminder that a particular person was once there. Guerrero notes that “carrying balances over the long term for former employees carries some risk and added responsibility.” Further, he cautions, “former employees with balances of $5,000 or less may actually cause the plan to incur an unnecessary audit fee, adding administrative difficulty, and potentially increasing fees per participant paid to the custodian and third party administrator.”

And that’s not all. Guerrero says that former employees staying in the plan raises other issues as well:

  • How up-to-date are their addresses?

  • Are they still living the United States or even alive?

  • What are the escheatment laws in the state where the employer is located?

  • When can the account be considered to have been abandoned?

What an Employer Can Do

Employers are not powerless in avoiding the pitfalls of former employees sticking around in the retirement plan. Guerrero has some suggestions:

  • An employer whose plan lacks a mandatory cash-out provision can amend it to provide for (1) a cash distribution of vested balances up to $1,000 and (2) a rollover of vested balances between $1,000 and 5,000 to a designated IRA.

  • At a departing employee’s exit interview, an employer could provide an IRA rollover kit or instructions regarding how to perform a rollover.

“The key,” Guerrero says, “is to have the details clearly defined in your plan document and to notify the separated employee in writing about what is going to occur.” He adds, “The point is simple — there is potential for administrative efficiencies when keeping your plan lean by restricting your plan to only current employees and making terminated employees in eligible for a mandatory cash-out.”