There
are special rules for
401(k)
plans with a cash-out policy that don’t
allow you to leave your assets in the plan if your account value is
less than $5,000.
The rule doesn’t
interfere with your right to choose to transfer the assets to a new
employer’s plan,
roll over
the money to an IRA of your own choosing, or
even elect to take a cash distribution.
But
if your account value is more than $1,000 but less than $5,000 when you
leave your job, and you haven’t provided instructions for how you want
your distribution handled, your former employer must roll the assets
over into a designated
individual retirement account
(IRA). In contrast, if the balance is less than $1,000, your former
employer is not required to roll over the amount to an IRA, and may
cash you out by sending a check for the account value minus 20% if you
don’t provide instructions for what you want done with the money.
The law requires that the IRA your employer selects is designed to preserve
principal
and maintain the initial dollar amount of your assets — investments such as
money market funds
and interest-bearing savings vehicles. That means that while you
probably won’t lose money in the account your employer selects, you
almost certainly won’t earn enough to outpace
inflation.
The IRA provider may also charge a fee for maintaining the account.
Another
alternative is for your employer to change the terms of the plan and
allow accounts with balances larger than $1,000 to remain in the plan.
In this case, 401(k) balances above that amount would not be
automatically rolled over to an IRA.
