Distribution kits
Our distribution kit provides education materials for you and your employees. Distribution kits can be automatically mailed to terminated employees.
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.
* 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.
Your former employees’ options and what they mean for you
Here are options former employees have when leaving your employment and how each affects your plan:
- Roll to an IRA. By selecting this option, former employees can keep the same tax benefits and avoid possible penalties on their retirement assets. Former employees can initiate a direct rollover and set up an IRA at the same time by requesting a withdrawal from their account online.
What this means for you: This means very little paperwork for you.
- Stay invested in the plan. Some former employees may elect to leave their assets in the plan. Like a rollover IRA, this keeps the assets protected from possible taxes and penalties.
What this means for you: While this requires no immediate paperwork for you, it does raise some important issues, including the recordkeeping and compliance costs of maintaining these accounts. Depending on the terms of your plan, small account balances may be automatically rolled into IRAs or distributed in cash. For more details, see When former employees fail to make a decision below.
- Move to another plan. By moving the money to a new employer’s plan, former employees keep their money protected from possible taxes and penalties. Keep in mind that not all plans accept rollovers. If your plan offers the Roth contribution option, former employees will need to check if their new plans accept Roth rollovers. Former employees with Roth balances can elect to move to another plan by requesting a withdrawal from their account online.
What this means for you: Make sure former employees verify that the new employer’s plan will accept rollovers.
- Take the distribution in cash. Former employees may decide to take their retirement assets in cash despite the possible taxes and penalties. To do so, they can log into their account online and request a withdrawal.
What this means for you: You must notify former employees who choose this option that 20% of the taxable portion of the distribution will be withheld and sent to the IRS. If they decide within 60 days to roll over the money after a distribution check has been issued (known as an indirect rollover), they must replace all or part of the money withheld out of their own pocket; otherwise, the amount not replaced is subject to taxes and possible penalties. In addition, you must provide former employees a written explanation of the tax consequences. These include withholding taxes, early withdrawal penalties, special tax treatments and rollover options. The withholding and tax consequences disclosures are both included in the online distribution request process and with distribution forms.
- Take periodic payments. If your plan allows installment payments, former employees can set up a periodic withdrawal schedule with the Installment Payments Withdrawal form. If your plan does not provide for installment payments, assets can be rolled into an IRA.
What this means for you: If the former employees elect to take periodic withdrawals from the plan, you’ll need to make sure the annual withdrawals meet the required minimum distribution requirement.
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. You must provide a written explanation of the tax consequences. These include withholding of income taxes, applicable early withdrawal penalties, special tax treatments and rollover options. You also need to notify your former employees 30 days prior to making the cash distribution.
- 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 and maintain all legally required communications.
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.