The SECURE 2.0 Act | PensionBee (US)

Summary

The SECURE 2.0 Act raises the 401(k) involuntary cash-out threshold to $7,000. Learn what it means for advisors and plan sponsors.

Key Takeaways

SECURE 2.0 allows plans to raise the involuntary cash‑out threshold, giving sponsors more flexibility in managing former participant balances.
Inactive and missing participant accounts create ongoing administrative and fiduciary challenges that plans must manage prudently.
Automatic rollovers help reduce dormant accounts and support more efficient plan administration when participants do not provide distribution instructions.
Selecting a Safe Harbor IRA provider is a fiduciary decision that requires careful evaluation of fees, investments, and participant protections.
A documented review process strengthens fiduciary oversight and supports compliant implementation of automatic rollover strategies.

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The SECURE 2.0 Act introduced several changes designed to modernize retirement plan administration and provide greater flexibility for plan sponsors and fiduciaries. Under Section 304, the act raised the involuntary cash-out threshold for terminated participants to $7,000. Adopting it isn't automatic. Plan sponsors have to choose to amend their plans first.

Given that adoption requires a formal amendment, now is a natural point for plan sponsors to evaluate whether raising the limit and pairing it with automatic rollovers into a Safe Harbor IRA could support a more streamlined approach to plan administration.

What Did SECURE 2.0 What Did SECURE 2.0 Change About the 401(k) Rollover Threshold?

Section 304 of SECURE 2.0 permits plan sponsors to raise the involuntary cash-out limit from $5,000 to $7,000, effective for distributions made after December 31, 2023. Adoption is optional: plans that want to use the higher limit must formally amend their plan document, with a deadline of December 31, 2026 for most plans.

Under the updated rules, eligible terminated participant balances between $1,000 and $7,000 may be automatically rolled into a Safe Harbor IRA if the plan document permits this provision. The table below outlines how account balances are generally handled under the current force-out and automatic rollover framework.

Current Force-Out and Automatic Rollover Limits

Account Balance	Common Action
Under $1,000	A check may be issued directly to the participant
$1,000 – $7,000	Can be rolled into a Safe Harbor IRA
Over $7,000	Participant consent is generally required

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PensionBee works directly with RIAs and plan sponsors to handle the automatic rollover process from end to end, managing participant notices and clearing small accounts.

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Why Do Former Participant Balances Create Fiduciary Risk?

When employees leave an organization, their retirement accounts often remain in the plan unless they actively choose another distribution option. These inactive accounts can create ongoing administrative responsibilities and fiduciary considerations for plan sponsors, particularly as account populations grow over time.

Under ERISA Section 404(a), plan fiduciaries are responsible for acting prudently and in the best interest of participants and beneficiaries. Managing former participant accounts requires continued oversight of areas such as recordkeeping, participant communications, fees, and account administration.

The table below highlights some of the key fiduciary risks associated with maintaining inactive participant accounts.

Why Inactive Accounts Create Fiduciary Risk

Risk Area	Impact
Administrative burden	Requires additional recordkeeping, participant communications, compliance tracking, and audit support.
Fees and expenses	May increase plan costs as additional administration and servicing are required for small, inactive account balances.
Missing participants	Creates potential fiduciary concerns if participant searches, documentation, and account tracking processes are not properly maintained.
Fraud/communication risk	Outdated contact information, low participant engagement, and uncashed checks can make account management more difficult.
Plan termination delays	Unresolved small balances or missing participants can delay plan termination, final distributions, and audit completion.

By raising the threshold, SECURE 2.0 gives plan sponsors a wider window to move eligible balances out of the plan, but only for those who choose to adopt it. Reviewing inactive account populations against the new limit is a useful first step in deciding whether the change makes sense for your plan.

How Do Automatic Rollovers Support 401(k) Plan Administration Under SECURE 2.0?

An automatic rollover occurs when a terminated participant with an eligible account balance does not provide distribution instructions. Instead of issuing a taxable distribution, the plan transfers the participant's assets into a Safe Harbor IRA established in their name, allowing the assets to remain tax-deferred while removing inactive accounts from the employer-sponsored plan.

For plans that adopt the higher SECURE 2.0 threshold, more former‑participant balances become eligible for this treatment. This gives plan sponsors and advisors a clear reason to revisit their processes for managing terminated participants.

When implemented as part of a broader former participant strategy, automatic rollovers can help address several operational and fiduciary considerations:

Impact of Automatic Rollovers on Plans and Advisors

Area	Impact on Advisors and Plan Sponsors
Plan Administration	Fewer dormant accounts remain in the plan.
Participant Retention	Reduced the likelihood of small-balance cash-outs.
Fiduciary Oversight	Greater emphasis on prudent provider selection.
Compliance	Increased importance of notices and documentation.
Operational Efficiency	Streamlined management of terminated participants.

What Fiduciary Considerations Apply to Automatic Rollovers Under SECURE 2.0?

Selecting a Safe Harbor IRA provider is a fiduciary decision that requires thoughtful review and documentation. These accounts typically use capital-preservation investments, making fees and provider practices important considerations, particularly for smaller account balances. Plan sponsors and advisors should evaluate whether a provider arrangement supports reasonable costs, effective administration, and appropriate participant protections.

A thorough provider review process should consider the key factors below when evaluating an automatic rollover solution:

Key Provider Evaluation Framework

Evaluation Area	What to Ask
Participant fees	Are fees low enough to avoid material erosion of small balances over time?
Principal preservation	Does the default investment align with Safe Harbor IRA requirements?
Participant outreach	Does the provider actively attempt to locate and re-engage missing participants?
Missing participants or beneficiaries	What happens to accounts that remain unclaimed over extended periods?
Distribution tracking	How is reporting structured for audit readiness and Form 5500 accuracy?
Fiduciary documentation	Does the provider supply records sufficient to support a defensible due diligence process?

Maintaining a documented evaluation process helps demonstrate that fiduciaries considered fees, provider capabilities, participant protections, and ongoing oversight when implementing an automatic rollover strategy.

Turning the SECURE 2.0 Rollover Threshold Into an Opportunity

The increase in the involuntary cash-out threshold to $7,000 gives plan sponsors and advisors an opportunity to reassess how former participant accounts are managed. Reviewing inactive account populations, plan provisions, and existing rollover processes can help identify opportunities to improve plan efficiency while maintaining a prudent fiduciary approach.

PensionBee’s automatic rollover IRA solution handles this end-to-end. By processing distributions into an institutional-grade IRA, the solution helps facilitate the compliant and efficient removal of terminated participant balances from the plan. For advisors, it provides a solution to a problem that commonly arises in plan reviews with long-tenured clients and during plan terminations. For plan sponsors, it helps simplify processes and improve overall plan health without adding administrative burden.

Frequently Asked Questions (FAQs)

What did SECURE 2.0 change about automatic rollovers?

SECURE 2.0 (Section 304) raised the involuntary cash-out limit from $5,000 to $7,000, effective for plan years beginning after December 31st, 2023. This means plan sponsors can now process distributions for terminated participants with vested balances up to $7,000.

What is a force-out provision and when does it apply?

A force-out provision allows plan sponsors to automatically distribute small retirement account balances when a participant terminates employment, if the plan includes this feature. Generally, force-out rules apply to vested balances between $1,000 and $7,000 when the participant does not make an affirmative election about where the funds should go. Under DOL Reg. 2550.404a-2, those balances may be rolled into a Safe Harbor IRA, while balances under $1,000 may be distributed as cash.

What are automatic rollovers?

Automatic rollovers are transfers of a former employee’s retirement account balance into an IRA or another eligible retirement plan when they leave an employer and don’t actively choose what to do with their funds.

What is a Safe Harbor IRA?

A Safe Harbor IRA is an individual retirement account used to receive automatic distributions from retirement plans for terminated employees with small account balances (under $7,000). Under ERISA and SECURE 2.0, plan sponsors have the option to roll these balances into Safe Harbor IRAs rather than distributing them as cash.

Is rolling balances into a Safe Harbor IRA mandatory?

No. It depends on whether the plan includes a force-out provision. Plans are not required to have one. However, plans that do must administer it consistently, in compliance with DOL Reg. 2550.404a-2, with a qualified provider selection process in place.

Why should plan sponsors review former participant accounts?

Inactive participant accounts can create ongoing administrative and fiduciary responsibilities, including recordkeeping, participant communications, missing participant management, and compliance oversight. Reviewing these accounts can help plans determine whether their current processes remain efficient and aligned with plan objectives.

What are inactive participant accounts?

An inactive participant account is a retirement plan account owned by an individual who is no longer actively contributing. This usually happens after they leave the company. The account still holds a balance in the plan.

What should be evaluated when selecting a Safe Harbor IRA provider?

Before selecting a Safe Harbor IRA provider, advisors should evaluate and document a comparison of the current plan versus the rollover destination, including fees and expenses, investment options and quality, available services such as advice and reporting, withdrawal flexibility and plan-specific restrictions, and differences in creditor protection between account types. This documentation is widely considered a best practice and helps support the plan sponsor's or advisor's own fiduciary due-diligence process in selecting a provider.

What are the risks of taking a hands-off approach to plan decisions?

Decisions such as rollover provider selection, force-out thresholds, and plan design features require ongoing monitoring. Failing to revisit these decisions can lead to outdated practices, potentially higher fees, and increased fiduciary exposure.

Why does participant offboarding matter in retirement plans?

The offboarding process is a critical moment where participants make decisions about their retirement savings. Poor communication or lack of guidance can lead to cash-outs, resulting in retirement leakage and potential taxes and penalties.

Disclaimer

Investing involves risk. This post, and any associated customer testimonial or third party endorsement, is provided solely for informational and educational purposes, should not be taken as tax, legal, financial or investment advice and is not an offer, solicitation, or recommendation to buy or sell any securities or investments.

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