Safe Harbor IRAs When a 401(k) Plan Terminates

A 401(k) plan can’t finish terminating until every account is gone. Most participants pick a rollover or a distribution when they get the notice. Some never answer, and their money still has to go somewhere. A safe harbor IRA is the place the Department of Labor allows, if the plan follows the rules.

When can a plan use a safe harbor IRA?

In two situations.

• Automatic rollovers under 29 CFR 2550.404a-2 cover mandatory cash-outs from an ongoing plan. These are capped at the IRC §401(a)(31)(B) limit, which SECURE 2.0 §304 raised to $7,000 for distributions after December 31, 2023.
• Terminated plan distributions under 29 CFR 2550.404a-3 cover missing and nonresponsive participants when a plan shuts down. That regulation has no dollar limit.

Outside those two situations, a nonresponsive participant’s money stays in the plan. A participant with $80,000 in an ongoing plan can’t be moved out without their consent.

What does the safe harbor require?

The details differ between the two regulations, but the core conditions are the same.

• The plan enters a written agreement with the IRA provider that the participant can enforce
• The money is invested in a product designed to preserve principal and provide a reasonable rate of return
• Fees and expenses are no higher than what the provider charges for comparable IRAs
• The arrangement doesn’t involve a prohibited transaction

For a terminated plan, participants also get a notice explaining that the plan is ending, what their options are, and that their account will go to an IRA if they don’t make an election within 30 days.

How hard does the plan have to look for missing participants?

Hard enough to show it tried. For terminated defined contribution plans, the DOL’s Field Assistance Bulletin 2014-01 lists four steps a fiduciary should always take before treating a participant as missing.

1. Send a notice by certified mail
2. Check the records of related plans and of the employer
3. Ask the participant’s designated beneficiary for current contact information
4. Use free electronic search tools, such as internet search engines and public record databases

If those don’t work, the fiduciary should consider paid search services, weighing the size of the account against the cost. Document each step, since the search is part of the plan’s fiduciary record.

Download our plan termination checklist to track each step.

Does it matter which safe harbor IRA provider the plan picks?

Yes. Choosing the provider is a fiduciary decision. The plan should look at fees, the default investment, how the provider keeps searching for participants, and how a participant claims the account later, and keep a record of why it chose the provider it did.

What happens when a participant is found?

The participant verifies their identity and claims the account. From there they can keep the IRA, roll it to another provider, or take a distribution. Many will also want help deciding, which is where the plan’s advisor comes back in.

How does AET handle safe harbor IRAs?

AET offers safe harbor IRAs alongside our rollover IRA program for plan advisors, so one custodian handles the participants who choose a rollover and the ones who never respond.

• We open safe harbor IRAs for nonresponsive participants when a plan terminates
• We keep looking for participants after the plan closes
• Participants claim their accounts online
• The plan’s advisor sees every safe harbor account, and which ones have been claimed, in our Business Portal

AET is a Nevada-chartered trust company, regulated by the Nevada Financial Institutions Division, with SOC 1 Type II and SOC 2 Type II audited controls.

Frequently asked questions

Is there a dollar limit on safe harbor IRAs? For automatic rollovers from ongoing plans, yes, $7,000. For missing participants in a terminated plan, the safe harbor in 29 CFR 2550.404a-3 has no balance limit.

Can a plan move a nonresponsive participant with $80,000 out of an ongoing plan? No. Balances over $7,000 need the participant’s consent unless the plan is terminating.

Can a participant move a safe harbor IRA after claiming it? Yes. Once verified, the participant can keep the IRA, roll it to another provider, or take a distribution.

How does a plan get started? Contact our team before the termination notices go out.

Talk to us about plan terminations

If you’re terminating a plan or advise plans that may terminate, we’d like to hear from you. See our plan rollover program, or book a call with our team.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, legal, tax, or investment advice. Plan fiduciaries and advisers should confirm how these rules apply to a specific plan with ERISA counsel.