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If your employer is closing your retirement plan, you probably have more than a few questions. Don’t worry - plan participants write us with questions about plan terminations all the time, so we’ve compiled answers to the most common ones below:
What Does it Mean When the Plan Terminates?
When the plan terminates, contributions will no longer be withheld from your paycheck or made by your employer. If you have a participant loan outstanding that is being repaid through payroll deduction, the loan payment will still need to be removed from your pay and sent to the plan on your behalf until the termination is completed.
Does my Employer Need to Tell Us About the Termination of the Plan?
Employers aren’t required to inform employees in advance of plan termination, but most employers will let employees know when the plan is being terminated.
What Does This Mean to My Benefits in the Plan? Will They Be Forfeited?
You are always fully vested in your own contributions and 401(k) deferrals to your employer’s plan. This means that you get to take all the money when you leave the company. However, it is likely that your plan gives you gradual vesting in the contributions the employer makes. (See our other FAQ article on this topic.) If the plan terminates, the plan is required to fully vest anyone who is employed at the time of the termination. In addition, if you left within five years of the plan termination, but your account is still in the plan, you also may be eligible for full vesting.
How Will My Benefits be Paid to Me?
You will have a choice of how to take your benefit from the plan. Usually, there are two options: take the funds in cash (minus 20% withholding for federal income taxes), or roll over your benefit to another employer plan or individual retirement account (IRA).
If you take the funds in cash, you will be taxed that year on those amounts. The 20% withholding may not be enough to cover all your taxes, so you should do some planning to be sure that you are not caught at year-end in a financial burden.
If you roll your funds into another 401(k) or IRA, you avoid taxation of the benefit until you remove the money from the receiving plan.
What if I Have a Loan Outstanding from the Plan When it Terminates?
At the time that the benefits are distributed from the terminated plan, if you have a loan, you will have three options:
- If you take no action to repay the loan, the amount of the outstanding loan will be taxable income to you when the balance of your account is distributed to you or rolled over.
- If you would like, you can repay the loan to the plan prior to the time that distribution is made. If you intend to roll over your benefit, this will avoid any taxes on your account.
- If you roll over your benefit to an IRA, you have until the due date of your tax return for the year of the rollover to deposit to your IRA an amount equal to the outstanding loan. If you do that, you will have been considered to have “rolled over” your loan, and will not be taxed on those funds.
If you are rolling over your benefit to another employer plan, there may be one more option. Some employers permit employees to roll over outstanding loans to their plan, where the participant may continue making payments under the loan documentation. This is not very common, but possible. You should check it out to see if it’s an option.