A force-out provision is a clause in your 401(k) plan document that requires dismissed participants with low balances to remove their funds from the plan. This article explains what a force-out provision is, how it works in your Gusto 401(k) plan, and why it may benefit your business. Expand the sections below to learn more.
Long-term plans or businesses in high-turnover industries can end up with a significant number of former employees who still have accounts under the plan — often with low balances.
Because participant accounts remain open under your plan as long as they have a balance, this can cause administrative issues and added expenses related to required notifications and possible plan audits for Form 5500 purposes.
The Internal Revenue Service (IRS) allows employers to add a force-out provision — a clause in your plan document that requires dismissed participants with balances below a certain threshold to remove their funds from the plan. If they do not take action, their assets are automatically rolled over to an individual retirement account (IRA) in their name.
A force-out provision can be added to your Gusto 401(k) plan document. The minimum balance threshold can range from $1,000 – $5,000¹ (not including rolled-over amounts), depending on the option you select for the plan.
Here's what happens when a force-out applies:
The affected participant gets a force-out notice with the date the force-out will take place (at least 30 days after the notice is sent).
If the participant does not take action to roll over or distribute their funds from your plan, they are automatically rolled over to a Gusto IRA in their name.
Once the rollover is done, the assets are no longer considered plan assets, and the former employee has full control over the IRA once they claim it.
¹ While the law allows for a force-out level up to $7,000, Gusto Retirement only supports force-out provisions up to $5,000 at this time.
A force-out provision can offer several benefits for your plan.
Form 5500 audits are often required for plans with more than 100 participants (both terminated and currently employed) with a balance in the plan. By forcing out former employees to an IRA, you can potentially avoid an expensive audit while participants continue to save for retirement — possibly at lower fees.
Note: Offering a force-out provision does not guarantee your plan will not require a Form 5500 plan audit.
Participants — including former employees — need to receive all required plan notices and disclosures. If Gusto Retirement cannot contact these participants on your behalf, you may need to reach out to them yourself. A force-out provision helps reduce the number of former employees you need to manage.
Dismissed participants who do not meet the balance threshold to keep their account under your plan have 30 days following service termination to distribute or roll over their balance before the force-out provision applies.
You will also get an email three business days before the force-out date to let you know who will be affected. Force-outs happen on the 20th of every month.
Important: Keep census data current and respond promptly to information requests. Missing data can prevent a force-out, and inconsistent application can affect your plan's qualified status.
If participants do not want their 401(k) balance forced into a Gusto IRA, they need to distribute or roll their funds out of the plan before the force-out date.
All participants who do not meet the balance requirement will be forced out. You cannot manually select which employees are forced out. Participants with account balances over the force-out limit need to be allowed to keep their assets in the plan, even after they no longer work for you.