Question:
❓ You left a job two years ago and forgot about the $4,000 sitting in your old 401(k). What could your former employer’s plan legally do with that money?
A) Nothing — it’s your money and they have to keep it there until you decide
B) Automatically cash it out and send you a check, minus taxes
C) Roll it into an IRA in your name without asking you first
D) Either B or C, depending on the plan’s rules
✅ Answer: D)
Either B or C, depending on the plan’s rules
Here’s why:
Yes — if your old 401(k) balance is under $7,000, your former employer’s plan can legally force a distribution, either by cashing it out or rolling it into an IRA, without your consent. Under Section 304 of the SECURE 2.0 Act, plans can set their involuntary cashout threshold as high as $7,000, up from the previous $5,000 limit. If your former 401(k) balance falls below whatever threshold the plan has adopted, they can distribute it without your consent. The plan is required to give you at least 30 days’ notice before it happens.
What they do with it depends on the amount and the plan’s rules. If the balance is under $1,000, many plans will simply cut you a check — with 20% withheld for federal taxes right off the top. On a $900 balance, that means you’d receive $720, and if you’re under 59½, you’d owe an additional 10% early withdrawal penalty at tax time.
If the balance is between $1,000 and $7,000, the plan must automatically roll it into an IRA in your name. No taxes, no penalty — but you might not even know it happened. This is one of the most common things that happens to a forgotten 401(k) after leaving a job — that IRA could be sitting at an institution you’ve never heard of, invested in something you didn’t choose.
Why the others are not correct:
A) This would only be true if the balance exceeded the plan’s cashout threshold (up to $7,000). Below that threshold, the plan has the legal right to force a distribution.
B) Automatic cashout is one possibility, but only for balances under $1,000. For balances between $1,000 and the plan’s threshold, the plan is required to roll it into an IRA rather than cash it out.
C) Automatic IRA rollover is a real possibility for balances between $1,000 and the plan’s threshold. But it’s not the only outcome, since smaller balances can be cashed out directly.
Takeaway:
If you’ve changed jobs and left money behind, check on it. A forgotten 401(k) under $7,000 might not stay where you left it — and where it ends up could cost you in taxes, penalties, or just lost track of your own money.
Sources: Section 304, SECURE 2.0 Act of 2022; IRS 401(k) Resource Guide — General Distribution Rules
