If My Company Closes, What Happens to My 401k?

What About Penalty Taxes if Your Company Shuts Down the 401k?

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If you work for a company that is shutting down, closing, or filing bankruptcy, you may be worried about what will happen to your 401k money. Here’s what you should expect.

Most of Your 401k Money is Yours – No Matter What

Your 401k money usually holds several different types of contributions. The contributions you put in are called salary deferral contributions. These always belong to you. The company cannot take this money.

It is yours by law. Most 401k plans have a separate plan administrator who provides service for the plan, and they would not allow your employer to take your money.

The contributions your company put in for you were either a matching contribution or a profit sharing contribution. Some of this money may belong to you; some may not. This type of contribution can be subject to a vesting schedule – which means the longer you are with the company, the more of that money belongs to you. Whatever portion of your employer contributions that you are 100% vested in belongs to you. That part of the money is secure.

Is Any of the Money at Risk?

When you make a contribution to your 401k plan, your employer withholds the money from your paycheck and then sends it to the 401k plan. If your company had withheld money but then closed or filed bankruptcy before they sent the money to the 401k plan, then that pay period’s contributions may be at risk.

With matching contributions or profit sharing contributions, your employer must 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 they close or file 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 401k plan, and the company is now worthless, then that part of your 401k plan will obviously have no value. It is one of many good reasons to diversify out of company stock.

If My Company Shuts Down the 401k Plan, Will I Owe Penalty Taxes?

If your company shuts down, files bankruptcy, or closes the 401k plan, you have several ways to keep your 401k 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 401k money to an IRA account. If your 401k plan has been terminated and your employer no longer exists there will be no taxes or penalties assessed on a rollover.

If you work for a new company that has a 401k, you may transfer your old 401k money right into your new 401k plan. Ask the plan administrator of your current plan for the paperwork needed to do this.

You can also cash out your 401k plan, but this is rarely a good idea. You will owe taxes and possibly penalties if you do this. Also, 401k money is creditor protected, and by cashing it out, you will lose this protection. You will also be eroding your nest egg. You should use an IRA rollover or transfer to a new 401k plan instead of cashing in this money.

What If I Had Taken a 401k Loan?

If you had borrowed money from your 401k plan, I do not have good news for you. You have 60 days to repay the loan, or it will be considered a distribution, and it will be taxable income to you. This type of distribution is reported at year end on a 1099-R tax form. If you are under 59 1/2, you will owe a 10% early withdrawal penalty tax on the distribution in addition to income taxes.

What If You Can’t Find Your Old 401k Plan?

You may have money sitting in a 401k 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 the first place you may want to check is The National Registry to see if you are listed. You might also try searching the Department of Labor’s Abandoned Plan Database.