What Happens To Your 401K If Your Company Closes?

If your company is struggling financially, you might be wondering, what happens to your 401K if your company closes goes bankrupt? We will provide you with everything you need to know about what happens to your 401K if your company closes.

What Happens to Your 401(k) If Your Company Closes?

If your company closes or files for bankruptcy, rest assured that nothing will happen to your 401(k) funds. This is so because 401(k) funds are usually held separately from your company’s funds and property. So, whether you’re company is closing or going bankrupt, your employer and employer’s creditors have no means to access the funds in your 401(k) plan. So, if your company were to go bankrupt, federal law prohibits your employer’s creditors from making a claim on retirement plan funds.

Your funds are likely safe because Federal law mandates that employers keep your 401(k) funds separate from your company’s funds and assets. So, even if your company is going out of business, filing for bankruptcy, or closing, your employer’s creditors will not be able to gain access to your 401(k) funds. This is so because your funds are likely deposited into a trust or insurance contract that your employer’s creditors have no access to. So, neither your employer nor your employer’s creditors can access your money. So, as long as your employer or company has been regularly depositing your contributions into your 401(k) plan, your funds should be safe.

Having said that, there are some specific scenarios where you may lose out on a small portion of your funds if your company closes or goes out of business, let’s explore those specific scenarios.

If your company closes before depositing your funds into your 401(k), you will only lose the most recent contribution to your 401(k). Your previously deposited funds will still remain protected and available to you. Federal law mandates that employers deposit 401(k) contributions no later than the 15 business days of the month following the month in which the contributions are deducted from your pay.

This does not mean that your employer can wait until the 15th business day to deposit the funds because federal law mandates that funds be deposited at the earliest date they can be separated from the employer’s funds. The NARPP encourages employees to periodically check their 401(k) statements to ensure that their contributions are deposited into their 401(k) accounts in a timely manner. Most employees will be able to check the status of their 401(k) online.

So, companies often withhold money from your paycheck in order to deposit the money into your 401(k) plan account. If the company closes before transferring that money over to your 401(k) plan, those contributions may lost. But, the previously contributed amounts in your account are safe from your employer and its creditors.

If your employer matches the amount of money that you contribute into your 401(k) plan and such contributions are made according to a vesting schedule, you may not have access to certain funds until you’ve reached a certain benchmark, such as being employed for three years at the company. In this situation, if your company closes, you could lose the contributions. That said, the other contributions that were deposited into your account previously are safe.

What Happens If Your 401(k) Shuts Down?

If your company closes, you should not take your money out of your 401(k) plan. Instead, you have several options to keep that you should consider, here are some of those options:

1. Transferring Your Funds to a New 401(k) Plan

If you found a job after your previous company closed, you should consider transferring over your 401(k) plan to your new 401(k) plan. To do so, you should contact your 401(k) plan administrator and ask them about the process for doing so. Usually, you’ll have to fill out some paperwork and sign some documents and you will be able to transfer the funds from your old 401(k) plan to your new 401(k) plan.

2. Rolling Over Your 401(k) to an IRA

If you do not have a job lined up after your employer shut down, you should consider rolling over your 401(k) plan to an IRA account. Rolling over your funds from a 401(k) plan to an IRA allows you to avoid hefty taxes and penalties associated with cashing out your 401(k) plan.

3. Cashing Out Your IRA

The last option that you have is to cash out your 401(k) plan by taking out a one-time cash contribution. This should be your last option because the money that’s in your 401(k) plan is not taxed, so cashing it out will require you to pay taxes on it and some additional penalties may apply, as well.

Keeping your money in a 401(k) plan is a smart idea, especially if you anticipate filing for bankruptcy. This is so because 401(k) plans protect your money from creditors. If you cash out your 401(k) you will lose the protection it offers from creditors. Also, by cashing out your 401(k) plan, you would be eroding your life savings, so it’s best to either transfer the funds to your new 401(k) plan or roll it over into an IRA account.

What Should You Do If You Suspect That Your Company Is Going to Close?

The first thing that you should do if you have reason to believe that your company is closing, going out of business, or on the verge of filing for bankruptcy is to contact your 401(k) plan administrator and inquire about the status of your 401(k) and possible strategies to safeguard your funds.

If your company is merging with another company, your 401(k) plan is likely to be folded into a new 401(k) plan. However, if your company is closing, you must make a decision as to whether to roll your 401(k) plan into an IRA, transfer the funds in your 401(k) plan to a new 401(k) plan, or withdraw the funds via a one-time cash distribution.

Frequently Asked Questions (FAQs)

1. Can a company take your 401(k) money?

Your company can take your 401(k) money if your balance is less than $1,000 but your employer must provide you with a check in the amount of your 401(k) plan. Also, your employer can roll you over into an IRA of the company’s choice if your balance is between $1,000 and $5,000. If your 401(k) has funds that exceed $5000, your employer must leave your money in your 401(k) plan.

2. Can I withdraw the money in my 401(k) plan?

Yes, you can withdraw the money in your 401(k) plan, but you must be prepared to pay taxes and penalties if you’re making the withdrawal before reaching age 65 or the plan’s normal retirement age.

3. Can a company refuse to give you your 401(k)?

In some situations, a company can refuse to give your 401(k) funds.

4. What are some companies where I can roll over my 401(k) plan?

You can roll over your 401(k) plan into the following financial institutions:

  1. Merrill Edge
  2. TD Ameritrade
  3. Fidelity Investments
  4. Charles Schwabb
  5. Vangaurd

There are a variety of other financial institutions, but these are among the best to use.

5. What happens to my 401(k) plan if my company goes under?

If your company goes under, rest assured that the money you’ve contributed to your 401(k) plan is safe. This is so because 401(k) funds are usually held in a trust or insurance contract that protects the funds from your employer and your employer’s creditors. So, even if your company goes bankruptcy, your funds should remain safe.