401(k)ology – Mandatory Cash-Outs: Limits, Notices and Timing
By Joni L. Jennings, CPC, CPFA®, NQPC™ | Published February 12, 2026
Mandatory cash-out distributions may clear small account balances from the company’s 401(k) plan; however, forced cash-outs can also create risk, leakage, and unhappy former employees. This post breaks down the increased $7,000 cash-out limit under SECURE Act 2.0, default safe harbor rollover IRAs, and how auto portability works as an enhancement to the mandatory cash-outs so you can simplify administration while protecting participant outcomes. Learn the practical steps every plan sponsor should take now to align documents, notices, and operations.
One of the many reoccurring compliance concerns for plan sponsors is whether they can involuntarily distribute small account balances to terminated participants who have not elected to transfer, roll over, or take a full distribution from the plan. Plan documents are required to include the dollar limit that indicates the threshold the plan will enforce mandatory cash-outs. The threshold can be no higher than the statutory limit of $7,000 (which was increased by the SECURE Act 2.0 from $5,000, effective for mandatory cash-outs on or after January 1, 2024).
Mandatory cash-outs are an operational provision in retirement plan documents. Plans imposing a forced cash-out provision must follow certain notice and timing requirements. There are administrative advantages to having such procedures in place to enforce the mandatory cash-outs. For example, plan sponsors may reduce the number of balances in the plan for determining the filing requirements for the annual Form 5500 submissions (especially helpful for those with balances around 100), reduce the risk of lost or missing participants, reduce the reporting of terminated participants with a vested balance on Form 8955-SSA, and forfeit non-vested account balances of former employees.
The key to mandatory cash-outs is understanding the plan’s limits ensuring that terminated employees timely receive distribution notices, and scheduling cash-outs at regular cadences. That is the “process,” but equally (if not more) important is protecting the affected employees’ retirement savings through safe harbor rollover IRAs and auto portability.
In this post, we will review some of the key distribution terms, optional limits, and requirements for administering mandatory cash-outs from the company’s retirement plan.
What does “mandatory cash-out” mean?
A “mandatory cash-out” is a plan provision that allows a defined contribution plan (e.g., 401(k), 401(a), 403(b)) to distribute a terminated participant’s vested balance without consent if the balance is at or below a dollar limit set by the plan terms. Adopting such a provision is optional (not required as many assume) and plans can choose any threshold up to the legal statutory dollar limit of $7,000 set by SECURE Act 2.0.
How are the dollar limits applied?
Cash-Outs up to $7,000 permitted: This is the current statutory cap for involuntary cash‑outs for distributions made on or after January 1, 2024. Plans may set a lower threshold (e.g., $1,000, $5,000) or not impose mandatory cash‑outs at all.
Cash-Outs of $1,000 or less (no IRA required): If the plan imposes mandatory cash‑outs, it may pay the amount distributed directly to the participant by check (no default IRA required) if the distribution is under $1,000 (20% mandatory federal tax withholding required unless gross distribution is under $200).
Cash-Outs exceeding $1,000 (IRA required): If the participant makes no election after receiving the required tax notice and expiration of the election period, the plan must default the amount to an IRA via direct rollover (an “automatic rollover”).
Cash-Outs above $7,000 (or above the plan’s designated lower limit): Participant consent is required for the plan to make a distribution regardless of how long the participant has been terminated. CAUTION: Once the participant has reached the applicable age for Required Minimum Distributions, the plan will be required to distribute a minimum amount to the participant or beneficiary on an annual basis.
To illustrate, assume a plan elects to use the $7,000 maximum limit for mandatory cash-outs. If a terminated participant does not elect a distribution from the plan, the cash-out rules are as follows:
Vested balance under $200 – Direct payment to participant, no election required, no taxes withheld.
Vested balance over $200 but less than $1,000 – Direct payment to participant, mandatory 20% federal income tax withholding and additional 10% early withdrawal penalty may apply if participant is under age 59 ½ (refer to Exceptions to tax on early distributions).
Vested balance over $1,000 but less than $7,000 – Vested account balance is rolled over to an automatic rollover IRA for the participant.
Vested balance greater than $7,000 – Cannot distribute the account without the former participant’s consent.
Note: Non-vested employer monies cannot be forfeited until the participant has received a full distribution from the plan or (if later) following five (5) consecutive plan years in which less than 500 hours of service are performed by the employee each year (referred to as a 5 year break-in-service). For plans that use elapsed time rather than actual hours, that is five consecutive 12 month periods in which no service is performed beginning with the date of termination and each anniversary date thereafter. So, another benefit to following the mandatory cash-out provisions is the forfeiture of the non-vested employer money which can then be used according to the plan provisions.
What is an Automatic Rollover IRA?
If a plan imposes a mandatory cash-out limit above $1,000 and the participant does nothing, the plan cannot merely cut a distribution check to the participant and be done with it. Only amounts less than $1,000 (or a lower amount as determined by the plan provisions) may be paid as a direct payment, subject to applicable taxes. If a participant has a vested balance greater than $1,000, the balance must be distributed to an IRA account on behalf of the participant.
In plain English, the plan says: “You didn’t tell us what to do, so to protect your retirement savings we’re automatically rolling your money into an IRA for you instead of cashing it out and triggering taxes and penalties.”
If the plan follows the Department of Labor (DOL) “safe harbor” rules, the plan fiduciaries get protection for the decision to move the funds into the IRA and invest them in a default option that preserves principal.
What are the “Safe Harbor” Automatic IRA requirements?
To get fiduciary protection under the DOL safe harbor, the automatic rollover IRA must meet several conditions:
Regulated provider: The IRA must be with a bank, insurance company, trust company, or other regulated institution.
Conservative default investment: The default must be designed to preserve principal and provide a reasonable rate of return, commonly a money market fund or stable value (fixed income) product.
Reasonable, not excessive fees: Fees (set‑up, maintenance, investment) must be reasonable and not exceed comparable fees for small retail IRAs. Fees can be taken from the IRA, but the fees shouldn’t effectively eat away the account in a short period.
Clear disclosures: Participants must get information about the IRA provider, the default investment, and the fee structure. This information can be embedded in the plan’s summary plan description (SPD), summary of material modifications (SMM), or the distribution tax notices.
How Does Auto Portability Work With Mandatory Cash‑Outs?
Mandatory cash‑out rules control when small accounts are forced out of the plan.
Auto portability helps determine what happens next to those forced‑out balances.
They are layered on top of each other, not competing with each other.
What your plan already does (mandatory cash‑outs):
If the vested balance is more than $1,000 but at or below your plan’s cash‑out limit the plan must typically send the money to a default “automatic rollover IRA” in the participant’s name, rather than issuing a taxable check.What auto portability adds, if adopted:
Auto portability doesn’t change your cash‑out threshold or when you can force money out. Instead, it focuses on reconnecting small, forced‑out balances with the participant’s next employer plan.The “flow” of mandatory cash-outs and auto portability:
Your plan forces out a small balance under your mandatory cash‑out provision.
The money is sent to a safe harbor automatic rollover IRA.
An auto portability provider:
Maintains those IRAs as a kind of “parking lot” for small balances.
Periodically checks whether the same individual has become a participant in another participating plan (for example, at their new employer).
If there is a match:
The individual receives a notice explaining that their small IRA balance will be automatically rolled into their new employer’s plan unless they opt out.
If they do not opt out, the IRA balance is rolled into the new plan and the IRA is closed.
In other words, a mandatory cash‑out moves the money from your plan into a default IRA; auto portability then moves that IRA money into the participant’s new plan when possible. Plan sponsors are not required to opt into the Portability Services Network, but many of the industry’s largest recordkeeping providers are facilitating the opt-in for plan sponsors. Recordkeepers may facilitate the auto portability process differently, so it is important to review the process with your plan’s service provider to understand that recordkeeper’s auto portability process.
Plan administrators must provide distribution and tax notices when the participant separates from employment (or is otherwise entitled to a distribution) and before a mandatory cash-out. Auto portability only engages after the money is already sitting in that default IRA. Think of it as a second‑step process designed to prevent those small IRAs from becoming permanently “lost and forgotten.”
What are Required Participant Notices and Elections?
Plan administrators are required to provide the 402(f) “Special Tax Notice” to participants prior to processing an eligible rollover distribution from the plan. This notice may include an explanation of the automatic rollover procedures and identify the chosen default IRA provider, in addition to the plan’s cash‑out limits and the required response window (typically 30-90 days). Participants must be given a reasonable amount of time to elect the distribution method for their retirement funds; however, a participant may waive the notification period by returning the executed distribution election forms before the expiration of the response window.
The 402(f) “Special Tax Notice" was updated by the Internal Revenue Service in January 2026 (Notice 2026-13) to address the additional and optional distribution provisions included in the SECURE 2.0 Act. The updated tax notice is intended to be more easily digestible by the average participant and includes a table of contents (but it’s still 11 pages long).
Tax withholding basics for cash‑outs paid to the participant
Eligible rollover distributions not directly rolled over to another retirement plan or IRA are subject to 20% mandatory federal income‑tax withholding unless the aggregate eligible rollover distributions from the plan are under $200.
If the plan issues a check the participant never cashes, it’s still taxable (and reportable) in the year the distribution was made.
Spousal consent and special nuances
Spousal consent is not required for small cash‑outs at or below the cash‑out limit, even for plans subject to QJSA rules (Qualified Joint & Survivor Annuity). The majority of defined contribution, account balance type retirement plans are no longer subject to the spousal consent requirements unless there are money purchase pension plan assets or other protected benefits requiring preservation of the QJSA rules. Plans may optionally include spousal consent rules unless otherwise required by law.
Rollover accounts can be disregarded when determining whether consent is required (i.e., the plan terms can exclude rollovers when measuring the cash‑out threshold). However, if a cash‑out is distributed, the automatic‑rollover rule applies to the entire mandatory distribution, including amounts attributable to rollovers. Plans may elect in the adoption agreement to include or exclude rollover balances in applying the limit applicable to the mandatory cash-out provisions.
It is critically important that the plan sponsor understand the rules and regulations that are applicable to the plan, and to evaluate the distribution options that have been included in the plan’s legal document.
Operational Checklist for Plan Sponsors
Decide whether to use involuntary cash-outs and determine the threshold (anywhere up to $7,000).
Confirm whether rollover sources are included or excluded when applying the threshold.
If using a cash-out limit greater than $1,000, adopt a safe harbor default IRA.
Update the Summary Plan Description (SPD) and participant communications, including the default IRA provider and applicable fees.
Review the 402(f) Special Tax Notice and modify as appropriate for the plan.
Set a cadence for determining mandatory cash-outs and reviewing which former employees must be cashed out.
Decide is joining the Portability Services Network is right for your company and discuss with the plan’s service provider to see if auto portability is offered.
Review the plan for optional distribution provisions elected and set a calendar reminder for plan amendments required for SECURE 2.0 updates (December 31, 2026 for most plans).
Conclusion
Mandatory cash-outs can be a practical tool to reduce plan clutter and protect former participants, provided the cash-outs are implemented thoughtfully. By choosing an appropriate cash‑out threshold, defaulting eligible small balances to a well‑designed safe harbor automatic rollover IRA, and keeping your 402(f) tax notice and timing practices up to date, you can streamline administration while minimizing leakage. Auto portability offers an additional way to help reconnect forced‑out balances with participants’ next employer plans, further reducing lost accounts and preserving retirement savings.
If you’d like to review your plan document elections, notices, or operational procedures, or assess whether auto portability makes sense for your employee population, Newfront Retirement Services team is ready to help. Feel free to contact me or just connect to keep up to date on all things ERISA 401(k): Joni_LinkedIn and 401(k)ology
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Joni L. Jennings, CPC, CPFA®, NQPC™
Chief Compliance Officer, Newfront Retirement Services, Inc.
Joni Jennings, CPC, CPFA®, NQPC™ is Newfront Retirement Services, Inc. Chief Compliance Officer. Her 30 years of ERISA compliance experience expands value to sponsors of qualified retirement plans by offering compliance support to our team of advisors and valued clients. She specializes in IRS/DOL plan corrections for 401(k) plans, plan documents and plan design.
