Typically, a workplace retirement plan such as a 401(k) will have a provision that allows employers and plan sponsors to remove former employees with balances of $7,000 or less from their retirement plan. This provision helps to reduce employers’ costs and administrative burdens.
Former plan participants receive a notice from their employer about this mandatory cash-out and can choose where to move the balance. If a former employee doesn’t respond, the employer will roll over their balance to an individual retirement account (IRA) at a qualified custodian.
This new account is called an automatic rollover IRA and may be claimed by the former employee and may transfer the funds to another IRA provider or a current employer’s 401(k) plan (if permitted by the current employer’s plan) at any time.
