When a company shuts down, it raises questions for employees about what will happen to their 401(k) accounts. The good news is that defined-contribution plans, including 401(k)s, are protected under federal law. If your company shuts down, goes bankrupt, terminates your plan, or merges it with another plan, the money you’ve saved for retirement doesn’t disappear. You may, however, have to do a little homework to track it down.
Key Takeaways
- When a company closes, merges with another company, or files for bankruptcy protection, employee 401(k) accounts are still protected.
- If your company closes, you may have the option of rolling over 401(k) savings to a retirement plan with your new employer or to an individual retirement account (IRA).
- Whether you can keep all of the contributions your employer made to the plan will depend on the plan’s vesting schedule.
- Withdrawing funds from a 401(k) after your company closes may trigger a 10% early withdrawal penalty if you’re under age 59½.
What Happens to 401(k) Assets When a Company Closes?
A company closure may come as a shock to employees, especially those who have been contributing pretax dollars to a traditional 401(k) or saving with a Roth 401(k) account. You may be wondering whether your employer will get to keep some or all of the money in the account and how you’ll be able to access the money that belongs to you.
The federal Employee Retirement Income Security Act (ERISA) understands these concerns and makes certain provisions to protect savers. Specifically, ERISA prevents employers from commingling 401(k) assets with their own assets. This means that if your company is shutting down because your employer files for bankruptcy, creditors can’t make a claim on the savings in employee 401(k) accounts.
However, you’re not necessarily guaranteed to get all of the money in your 401(k) if your company goes out of business. There are two scenarios in which you may be entitled to less than the balance showing for your account:
- If your employer’s contributions are not fully vested: Employer contributions are subject to a vesting schedule, while employee elective-deferral contributions are not. This means that a certain amount of time must pass before your employer’s contributions are considered to belong to you. Typically, vesting occurs within three to six years, so if your company closes before some of your employer’s matching contributions are fully vested, you wouldn’t be able to collect that money.
- If contributions have not been deposited: ERISA requires employers to deposit elective-deferral contributions to a 401(k) into the plan within 15 business days of the end of the month in which the money was withheld from your paycheck. The window shrinks to seven business days if your plan has fewer than 100 participants. If your company folds before those deposits are completed, then that money may be at risk, depending on the circ*mstances under which the company closed.
It’s also important to keep in mind what could happen to any stock or stock options you own in the company should it go out of business. If the company shuts down completely, then any options you own could be worthless. In the event of a merger or a bankruptcy filing, either one could significantly affect the value of any shares you hold in the company.
If your company closes down while you have a 401(k) loan outstanding, the balance will become repayable in full. If you can’t repay it, the entire amount becomes a taxable distribution.
How to Manage a 401(k) if Your Company Closes
If your company closes, then you have a few options when deciding what to do with your 401(k) account. Keep in mind that if the company is merging with another company, your savings may automatically be moved into the new company’s 401(k) plan. You won’t lose any of your money, but you may need to resubmit enrollment paperwork and/or review your elective-deferral contributions and investment choices for the plan.
If the company is closing down completely, you’ll have three options for managing your 401(k) assets. You could:
Requesting a direct rollover of 401(k) funds is the best way to avoid triggering tax consequences.
- Roll over the money to your new employer’s plan: If you’re able to secure employment with a company that offers a qualified retirement plan, you could execute a rollover of the money from your old 401(k) to it. The Internal Revenue Service (IRS) allows employees to roll over money from one 401(k) to another 401(k); to a 403(b) plan; or to a Roth account, whether a 401(k), 403(b), or 457 plan.
- Roll over the money to an IRA: If your new employer doesn’t offer a qualified plan, you could roll over your 401(k) money to an individual retirement account (IRA) instead. If you had a traditional 401(k), you could roll it over into a traditional or Roth IRA. With Roth 401(k) accounts, you can only roll them over into a Roth IRA.
- Take a distribution: The third option for managing an old 401(k) is withdrawing the money. However, this comes with a big caveat: withdrawals made before age 59½ are generally subject to a 10% early-withdrawal penalty, in addition to the typical income tax. The IRS does allow for some exceptions to the penalty (that is, hardship withdrawals), but these are limited.
Taking money out of your 401(k) early can shrink your money’s growth potential, which can result in a smaller nest egg for retirement.
If you don’t have an IRA yet, you’ll need to open one at a brokerage in order to complete a 401(k) rollover. When comparing IRA accounts, take a close look at the investment options offered as well as the range of fees you might pay. Choosing an IRA that offers a mix of mutual funds and exchange-traded funds (ETFs) with low expense ratios can help you to build a diversified, cost-efficient portfolio.
What Happens to My 401(k) if My Company Closes?
If your company closes, the money in your 401(k) doesn’t disappear. The money will remain in your employer’s plan unless the plan itself is terminated. In that case, the money in your account will roll over to another account on your behalf or get distributed directly to you. Keep in mind that early distributions may trigger tax penalties. That's why it's crucial to request a direct rollover, not a withdrawal.
Can a Company Close Out Your 401(k)?
Yes, under certain circ*mstances, a company can close your 401(k) account if you no longer work there. The IRS allows this if your plan balance is less than $5,000. Your former employer is required to provide you with notice that your account will be closed and where the money will be sent.
How Do I Find an Old 401(k)?
If you left a 401(k) behind when changing jobs, the first place to look for it is your previous employer. A human resources representative or benefits coordinator may be able to tell you where your money is and how to access it. If the company has closed down completely, you may be able to contact the plan administrator to ask about your savings. Should that fail, you can try the U.S. Department of Labor’s abandoned plan database to try to find your old 401(k).
The Bottom Line
The prospect of your company closing may be destabilizing, especially if you have little notice beforehand, but it’s important to know that the money you’ve worked hard to save in your 401(k) hasn’t gone up in smoke.
How you handle your 401(k) can depend on the circ*mstances under which the company closes, but it’s good to know that you do have options for continuing to grow your retirement wealth.
