Group Warns Tax Code Change May Harm Participants

March 6, 2002 ( - A fund company said employers are dumping low-balance 401(k) accounts ahead of the adoption by the Department of Labor of a tax code change embedded in EGTRRA, the Economic Growth and Tax Relief Reconciliation Act of 2001.

Pax World Funds, a mutual fund company based in Portsmouth, New Hampshire, thinks participants should be alarmed. According to the fund company, a rule in the new law increasing 401(k) plan portability is backfiring for participants with low balances.

Under a tax code change awaiting adoption by the DoL, employers can automatically roll over 401(k) accounts with $1,000-$5,000 into IRAs with no tax penalties for employees. The new law is designed to increase the portability of 401(k) plan assets of employees who have lost or switched jobs. 

At the same time that employers notify employees that they can roll over their assets into an IRA, participants can also be issued a check for their balances. If a participant elects to receive a check, employers can withhold up to 20% of the plan’s assets for tax purposes. On top of this, participants who cash their checks rather than rolling the balance into an IRA or another qualified retirement plan will pay income tax on their plan assets plus an additional 10% penalty.

To make matters worse, Pax World Funds claims that rather than wait for the new DOL rules to be issued and go into effect, employers are dumping low-balance 401(k) accounts to beat the high administrative costs of keeping them intact. Pax did not provide data to back up its claim, which is supported by