It’s 2026 and the SECURE 2.0 Act of 2022 continues to draw attention, including an often-overlooked optional provision that allows retirement plan sponsors to raise the automatic cash-out limit for terminated participants’ vested account balances from $5,000 to $7,000.
While many sponsors are focused on major mandatory changes like the Roth catch-up rules, this optional adjustment can offer administrative and cost benefits.
Under long-standing retirement plan rules, plans can distribute a former employee’s vested account balance without the participant’s consent if it falls below a statutory threshold. If the balance is between $1,000 and the limit, but the participant takes no action, the plan must automatically roll it into an IRA on the participant’s behalf. Prior to SECURE 2.0, this threshold was $5,000; the law now allows sponsors to raise it to $7,000, but only if the plan is amended accordingly by December 31, 2026 (the required amendment adoption date for many provisions). Plans that adopt the higher limit must operate in accordance with that limit from the amendment’s effective date.
There are benefits to this change. Increasing the automatic cash-out threshold can significantly ease plan administration. Allowing smaller, inactive accounts to be distributed and removed from the plan reduces ongoing recordkeeping fees, simplifies required communications, and limits the time spent tracking missing participants.
Despite these advantages, sponsors should carefully evaluate the potential drawbacks. Some participants with balances between $5,000 and $7,000 might prefer to keep their assets in the employer plan, especially if it offers strong investment options or lower fees compared with an IRA. Implementing the change also involves operational work: formal plan amendments, updates to plan documents and participant notices, and ensuring recordkeepers and custodians are prepared to administer the new limit. Plan fiduciaries also need to reassess whether their chosen automatic rollover IRA provider remains a prudent option given a larger volume of rollovers.
At the end of the day, deciding whether to adopt the $7,000 automatic cash-out limit isn’t a one-size-fits-all decision. Plan sponsors should consider all the angles, possible consult with a knowledgeable attorney and plan service providers to see if it works for them.
Do you still have questions about retirement planning options?
Follow us on LinkedIn and Facebook!
If you have other questions about retirement plan loans, email us or call 937.308.0758.
Recent Comments