If you work for a company that is closing, changing ownership, or filing for bankruptcy, you may be concerned about what will happen to the money in your 401(k) account.
Most of Your 401(k) Account Money Is Yours
Your 401(k) account usually contains different types of contributions. The contributions you deposit are called “salary deferral contributions.” These contributions always belong to you, as they represent your earned wages that have been paid into the 401(k) account. The company cannot take this money, and it is legally yours.
Companies often have an independent firm act as a fiduciary to administer the 401(k) plan to provide service to the plan. Whether your company has an internal or external plan fiduciary, these entities are obligated to a fiduciary duty to you as the account holder. This acts as a protection, keeping unethical employers from taking your money.
If your company contributed on your behalf, it either matches your contribution or makes a profit-sharing contribution. Some of this money may belong to you, and some may not.
This contribution can be subject to a vesting schedule, which means the longer you stay working with the company, the greater percentage of that money that belongs to you. The portion of your employer’s contributions that you own 100% belongs to you, so that part of your money is also safe.
Is Any Money at Risk?
When you contribute to your 401(k) plan, the employer deducts money from your paycheck and then sends it to the 401(k) plan accounts for investment.
If your company deducted the money but then closed or filed for bankruptcy before sending the money to the 401(k) plan, those contributions could be at risk.
In the case of matching contributions or profit-sharing contributions, the employer may wait until the funds are deposited by the tax filing deadline plus extensions, which could be in October of the following year for the contribution or profit-sharing earned. Again, if the company closes or files for bankruptcy before these funds are deposited, you may not receive that part of the money owed to you.
If you hold company stock in your 401(k) plan, and the company is now worthless, that portion of your 401(k) plan will also be worthless. This potential issue is one of many good reasons to diversify your investments outside of company stock.
If the 401(k) Plan Closes, Will I Owe Penalty Taxes?
If your company closes, files for bankruptcy, or shuts down its 401(k) plan, you will have several ways to keep your 401(k) plan money growing for the future without incurring any penalties or income taxes right now. You can do what is called a “rollover,” where you move your 401(k) plan money into an IRA account. If your 401(k) plan has been terminated and the employer is no longer around, no taxes or penalties will be levied on the rollover.
If you head to work for a new company that has a 401(k) plan, you may be able to directly transfer the funds from the old 401(k) plan into your new 401(k) plan. Ask your current plan fiduciary to get the necessary paperwork to do this.
You can also withdraw your 401(k) plan money, but this is generally not a good idea. The money has been deposited into your 401(k) plan on a pre-tax basis, so you will owe taxes on it and may also face penalties if you take the cash instead of placing it in a qualified investment account.
Protecting
The funds in a 401(k) plan are protected from creditors in the case of personal bankruptcy, and utilizing them will result in losing that protection. It will also affect your nest egg, and it would be better to use a rollover to an IRA or transfer to a new 401(k) plan instead of withdrawing those funds.
If You Have a 401(k) Loan
If you borrowed money from your 401(k) plan and haven’t repaid it yet, you will have 60 days to repay the loan; otherwise, it will be considered a cash distribution and will become taxable income for you.
This type of distribution is reported to the federal tax office at the end of the year on Form 1099-R. If you are under the age of 59 and a half, you will owe a 10% early payment penalty on the distribution in addition to regular taxes.
What If You Can’t Find Your Old 401(k) Plan?
You may have funds in a 401(k) plan from an employer you worked for a long time ago. If you can’t locate that employer, what can you do? The former employer may have registered you as a “missing participant,” so you may want to check the national registry to see if you’re listed there. You can also try searching the abandoned plan database of the Department of Labor.
Frequently Asked Questions
Why is it a bad idea to withdraw my money from my 401(k) if my company closes?
If you do not put that money into another 401(k) or IRA, you will be responsible for taxes and a 10% penalty when the next tax season comes. If you are over the age of 59 and a half, you will still owe taxes, but you will not owe the penalty.
If my company closes, how long do I have to do a 401(k) rollover?
You have 60 days from the time you stop working for the company to roll over your 401(k) plan. If you do not roll over your money within that time, you will be expected to pay the applicable taxes and penalties on those funds.
If my company merges with another company, what happens to my 401(k) plan?
In many cases, the company that buys your company will transfer your 401(k) plan to its own 401(k) plan administrator, and you will continue to contribute to that account as you did before. In other cases, your account may be kept separate for a time. You may need to open a new 401(k) account with the new employer and transfer the existing funds to that account. If your plan is terminated, you can still transfer your funds to an IRA.
Source: https://www.thebalancemoney.com/if-my-company-closes-what-happens-to-my-401k-2388225
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