IRS Sets New Rules to Prevent 401(k) Leakage

The Internal Revenue Service has just issued guidance on a rule that has been on the books since 2001 to prevent employers from liquidating 401(k) rollover accounts with values between $1,000 and $5,000, The Washington Post reports.

Heretofore, when an employee has left a job with a 401(k) plan with a mere $5,000 or less, the employer had the right to force workers to liquidate the account, which many were all to happy to do because of the account's meager size.

Now, beginning March 28, companies will be required to transfer those accounts to a new retirement account, such as an IRA or other tax-deferred account, if the employee doesn't direct the money to a new 401(k) plan or specifically ask to cash out. Employers also have the option of retaining the money in their 401(k) plan. Wherever the employer parks the money for an employee who departs without giving instructions, the employer must inform them of where the money is.

Congress passed the original legislation four years ago, knowing that while a 401(k) with only $5,000 in it may not be much, after decades, possibly 45 years of a worker's entire career, it could grow to a substantial size.