What to do when employees leave your company

When plan participants’ employment ends, they have several options to consider when deciding how to distribute their retirement savings.

By guiding former employees through the process, you can help them make informed decisions. By understanding each option, you’ll be prepared to meet your responsibilities.

Rolling into an American Funds IRA with Capital Bank & Trust Company (CB&T) as custodian

Help your participants understand the basics:

  • Rollovers invested in Class A shares are generally subject to the applicable sales charge. However, assets rolled over from your retirement plan (Class R shares) will be invested without a sales charge.
  • Class F shares can also be purchased through a broker-dealer’s fee-based program.
     

Your financial professional or third-party administrator can give you more information.

Distribution kits

Our distribution kit provides education materials for you and your employees about the options they have when leaving your employment. Distribution kits can be automatically mailed to terminated employees or downloaded online.

The kits include:

  • An educational brochure that explains the options
  • A decision-making checklist with next steps
  • Information about how to initiate distributions online*
     

To find the distribution kit in the Plan Service Center, click on the Employees tab at the top of the page and select Forms. Participants can log in to their accounts to download the kit or initiate a distribution.

When former employees fail to make a decision

If your employees don’t take any action, their vested account balances determine what you can do with the accounts (Roth account balances are treated separately):

  • Cash out. If the vested account balance is $1,000 or less, you can cash former employees out of the plan — if your plan rules allow such a distribution. Before processing a mandatory distribution (cash out), the participant must receive advance notice that explains what will happen if the participant does not make an election as well as the tax implications of the distribution options.

  • IRA rollover. Your plan rules may specify that vested account balances between $1,000 and $7,000 will be rolled into an IRA. However, if you don’t mind keeping these small balances in your plan, the plan can be amended to eliminate the automatic rollover provision by reducing the mandatory cash out threshold from $7,000 to $1,000.

  • Stay in the plan. Generally, if former employees have more than $7,000 in an account and don’t make a distribution election, you must keep the assets in the plan.

  • Contact us for information about our automated mandatory distribution service that automates the cash out and rollover process for employees that fail to make a decision.
     

Required minimum distributions

Former employees who are still in your plan must begin taking RMDs beginning with the year they turn 73 or the year they leave the company, whichever is later. Current employees do not have to take RMDs at any age unless they own more than 5% of the company. In that case, they must begin taking distributions beginning with the year they reach age 73. Participants can delay taking the first RMD until April 1 of the following year. Any participant who does not take an RMD may be subject to a 25% penalty on the amount that should have been withdrawn but was not.

Important:

You, as the plan sponsor, need to ensure that RMDs are taken every year. If not, your plan may be disqualified.

Your participants can sign up to have RMDs automatically calculated and distributed. To learn more, see these FAQs.

Footnote:
* Participants can request standard retirement, termination and in-service distributions online; forms are required for other distributions related to hardship, death, disability, divorce (qualified domestic relations order), company stock, self-directed brokerage accounts, annuities and required minimum distributions. If a participant does not have online access, distribution forms can be requested from us.
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