As the unemployment rates continue to climb, many Americans are stuck wondering what to do with their 401k and what happens if they weren’t fully vested into their retirement account.
Most of the time, it will make sense to rollover your 401k to an Individual Retirement Account (IRA). However, before you move the money you want to make sure that you have received all matching contributions and employer contributions. Also, if you are asked to leave prior to the vesting schedule, you may want to see if partial plan termination is occurring.
When your employer implemented the retirement plan benefit, the idea was that it would be there indefinitely. An employer doesn’t invest that money with the idea they will get you in the door and then blast the benefit out the door. However, you should be aware that an employer may terminate its 401k plan at its discreation.
A partial plan termination is deemed to occur when an employer-initiated action results in a significant decrease in plan participation.
This is important for you because the IRS deems that all affected participants are fully vested in their account balance upon the date of plan termination or partial plan termination. So, if the company has laid off 20% of the workforce then they are fully vested and this can result in thousands of dollars of matched 401k money and employer contributions.
For purposes of the Internal Revenue Code, a 401k plan is not fully terminated unless:
- The date of termination is established
- The benefits and liabilities under the plan are determined as of the date of plan termination
- All assets are distributed as soon as administratively feasible
According to the IRS, “As a participant, once you are notified that the plan is terminating, you should verify that you are properly vested in your account balance. If you terminated employment, but have not received a distribution as of the proposed plan termination date, you may be an affected participant.”
As an employer, you need to consider the partial termination when you are eliminating your workforce. If you are simply “firing” and “rehiring” then you will probably not have an issue. But, if you are laying off a significant number of people then you need to have this issue researched and investigated so that you are not blindsided by the potential costs of those layoffs.