Employers are not required by law to provide retirement plans for employees and may terminate a plan for various reasons including bankruptcy, merger or simply voluntarily terminating it if certain requirements are met, such as required notifications to plan participants and interested parties. Generally, employers should take specific actions when terminating a plan, including providing required notices to plan participants, amending the plan document, distributing assets and, if they wish, filing a Form 5310 with the Internal Revenue Service (IRS). Employers must notify employees that they intend to apply for a determination letter for the terminating plan between 10 and 24 days before they submit their application to the IRS for a determination letter.
Participants must receive notice of their election rights on the distributions to be made from the terminated plan 30-180 days before the date of distribution; notices should be delivered only when it’s reasonable to expect a distribution can be made within the next 180 days; and in some cases, a participant may waive the minimum 30-day notice period.
If you work for a company that is shutting down, changing ownership, or filing bankruptcy, you might be concerned about what will happen to the money in your 401(k) account.
In accordance with federal law, your employer must keep your 401(k) funds separate from the company’s assets, so business creditors have no access to it. You'll be able to keep most of the funds in your 401(k), and you can move them to another type of account to keep your nest egg safe.
Will I lose a portion of my retirement funds if I’m not fully vested in my retirement account when my plan is terminated?
You should not lose any of your account. When a plan terminates, the accrued benefits of all affected employees must become 100% vested (Internal Revenue Code Section 411(d)(3)).
Why is the IRS holding the money from my retirement plan now that the plan has terminated?
The IRS does not maintain or hold the assets during the plan termination process. When a plan has formally terminated and the plan sponsor has submitted a Form 5310, Application for Determination for Terminating Plan, the IRS will review the application. Many times, they ask for additional information before they issue a favorable letter, and the review process may last for several months. The employer or trustee is not required to hold the assets until they issue a favorable determination letter but usually will do so to ensure that plan distributions will receive the favorable tax treatment given to distributions from qualified plans.
Most of Your 401(k) Money is Yours
Your 401(k) account usually holds several different types of contributions. The contributions you put in are called salary deferral contributions. These always belong to you, as they represent your earned wages paid into the 401(k) account. The employer cannot take this money, and it is yours by law.
Employers often have a separate, independent firms acting as retirement plan administrators to provide service for the plan. Whether your employer has an internal or external plan administrator, that entity is bound by a fiduciary duty to put your needs first as the account holder. This acts as a safeguard because it protects an unscrupulous employer from taking your money.
If your employer made contributions for you, the employer was either matching your contribution or making a profit-sharing contribution. Some of this money may belong to you; some may not if it is subject to a vesting schedule. If the employer has a vesting schedule, the longer you stay employed with the employer, the more of that money belongs to you. The portion of your employer contributions in which you are 100 percent vested belong to you, so that part of your money also stays secure.
Is Any Money at Risk?
When you make a contribution to your 401(k) plan, your employer withholds the money from your paycheck and then sends it to the 401(k) plan accounts to be invested. If your employer had withheld money but then closed or filed bankruptcy before they sent the money to the 401(k) plan, then that pay period’s contributions may be at risk.
With matching contributions or profit sharing contributions, your employer may wait to deposit the funds by their tax filing deadline plus extensions, which can be as late as October of the year after you earned the match or profit sharing. Again, if the employer closes or files bankruptcy before they make this deposit, you may not receive that part of the money owed to you.
If you owned company stock in your 401(k) plan, and the company is now worthless, then that part of your 401(k) plan will also have no value. This potential problem is one of many good reasons to diversify out of your company’s stock.
If the 401(k) Plan Shuts Down, Will I Owe Penalty Taxes?
If your employer shuts down, files bankruptcy, or closes the 401(k) plan, you have several ways to keep your 401(k) money growing for your future without having to pay any penalties or income taxes right now.
You can do what is called a rollover, where you move your 401(k) money to an Individual Retirement Account (IRA) account. If your 401(k) plan has been terminated and your employer no longer exists there will be no taxes or penalties assessed on a rollover.
If you go to work for a new employer that has a 401(k) plan, you may transfer your old 401(k) money right into your new 401(k) plan. Ask your Human Resources Department or the current plan administrator for the paperwork needed to do this.
You can also cash out your 401(k) plan, but this is rarely a good idea. The money went into your 401(k) on a pretax basis, so you will owe taxes on it, and possibly penalties if you take the cash instead of putting it into another investment account.
Also, 401(k) money is protected from creditors in the event you had to file for personal bankruptcy, and by cashing it out, you will lose this protection. You will also be eroding your nest egg and would be better off using an IRA rollover or making a transfer to a new 401(k) plan instead of cashing in this money.
When must plan assets be distributed after a plan terminates?
Generally, an employer must distribute assets from a terminated plan as soon as administratively feasible after the date of plan termination.
The IRS determines whether the employer made distributions as soon as administratively feasible based on the facts and circumstances, but generally the IRS views this to mean within one year after plan termination.
If the assets are not distributed as soon as administratively feasible, the plan will be considered an ongoing plan and must continue to meet the qualification requirements of IRC Section 401(a) and the minimum funding requirements of IRC Section 412 (if applicable).
If You Have a 401(k) Loan
If you had borrowed money from your 401(k) plan and haven’t yet paid it back, this creates a challenging situation for you as you will have 60 days to repay the loan, or it will be considered a distribution of cash, and it will become taxable income to you.
This type of distribution is reported to the IRS at year end on a 1099-R tax form. If you are under 59 1/2, you will owe a 10 percent early withdrawal penalty tax on the distribution in addition to regular income taxes.
What If You Can’t Find Your Old 401(k) Plan?
You may have money sitting in a 401(k) plan from an employer you worked for a long time ago. If you can’t locate that employer, what else can you do? Your old employer may have listed you as a missing participant so you may want to check The National Registry to see if you are listed.
You can also try searching the Department of Labor’s Abandoned Plan Database https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/abandoned-plans.
Additional 401(k) Plan Termination information can be found on the Internal Revenue Service (IRS) website at: https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-termination.
NOTE: Defined benefit plans covered by Title IV of ERISA must meet additional requirements under rules administered by the Pension Benefit Guaranty Corporation, including forms and notices to participants relating to plan funding and the form of benefits to be paid. See IRS page: https://www.pbgc.gov/prac/terminations.