Just what the small-business owner needed — a new regulation that requires more work. In March, the Department of Labor handed down new regulations covering the disposition of funds abandoned in 401(k) plans when employees leave. Surprisingly often, it seems, workers with small account balances — $1,000 to $5,000 — don't bother to do the paperwork to transfer the money to a new employer's plan or into an IRA. Up until now, standard practice has been for employers to cash out the unclaimed accounts and send the money to the former employee — less up to 40 percent in penalties and fees. The employers did this routinely because they did not want the expense of maintaining the accounts.
The new law requires that employers roll over the accounts into other tax-deferred savings vehicles for the former employee. “It's an idea whose time has come,” says Ronald Bowser, CEO of Rollover Systems, a company that helps small businesses transfer accounts. “It's only fair.” But it's also a pain. Small businesses — companies without big HR and payroll departments — are just the kind of companies where employees are likely to walk away from small retirement accounts. Bowser says small businesses are likely to have a difficult time transferring the accounts and should prepare for a headache.