Once your work with an employer ends, options for the 401(k)
plan you hold with the company include cashing it out, rolling it over to your
new employer's 401(k), or transferring it into an individual retirement account
(IRA). But be forewarned: The choice you make may or may not involve paying
taxes to Uncle Sam.
Those moves, of course, all require access to the funds in
your 401(k) account. However, what happens if your employer denies that access
when your employment finishes? And why might that happen?
- As a rule, your own contributions to your 401(k)
and their earnings are readily available when you leave your employer.
- Access to your 401(k)'s employer contributions
may be denied because your tenure was too short for those funds to vest to you.
- Access to the entire balance may be blocked, at
least temporarily, due to issues related to your departure or a change of
record keepers for the plan.
Vesting May Limit Access to Some 401(k) Funds
In principle, it's illegal for a company to restrict access
to your personal 401(k) funds and the earnings they have made.1 However,
in practice, the balance in the account may not all be yours, because some
money may have been contributed by your employer via employer matching and you
may not have worked long enough in the job for those company contributions to
have vested to you.
Once you have reached the point of becoming fully vested,
often within a few years, the funds are all yours and, barring other issues,
the company is obliged to release them.1 "If you are restricted from
accessing your vested 401(k) funds, that is indeed illegal," says Stephen
Rischall, CFP®, CRPC®, and a partner in Navalign Wealth Partners, adding,
"At all times you have full rights to withdraw all of your contributions
made to the plan in addition to fully vested employer matching contributions,
Nevertheless, Mark T. Hebner, founder and president of Index
Fund Advisors, explains, "If there was a vesting schedule associated with
matching [employer] contributions, and you left before the date those funds
fully vested, you can legally be denied access to them."1
There is another reason you may not be entitled to any of
the funds: If the contributions to your 401(k) were made entirely by your
company and there was no vesting schedule for them.1 This could result in
loss of the account. As Jeremy E. Portnoff, MSFS, CFP®, CIMA®, founder of
Portnoff Financial points out, there is "a possibility that if the funds
were all employer contributions and are not vested, then you basically forfeit
the funds." So if you are considering a job move, it's important to know
your 401(k) plan's vesting schedule and understand what proportion of the
contributions (if any) are fully vested.
A company's vesting
schedule determines when employees own their employer's contributions to their
401(k) accounts; workers are always fully vested in their own contributions.1
Assets May Also Be Temporarily Frozen
Access to your funds, vested or not, may also be blocked if
litigation related to the plan is in process. In such instances, assets may be
temporarily frozen, Portnoff says. Similarly, according to Rischall, short-term
restricted access to your funds may happen "in the event the plan sponsor
is changing record keepers or there is a blackout period in which funds cannot
be changed or accessed in any way." You should know about this in advance,
he adds: "This is legal, and notices must be provided to active
participants at least 30 days prior to the blackout start date."
Finally, recently terminated employees may be subject to
different rules regarding access to their plans. These rules are governed by
things such as resolving any lingering financial issues around a worker's
departure—an outstanding loan, for example. If you've taken out a 401(k) loan
and leave your job, you'll have a specified time period in which to pay it
What to Do
If access to your funds is unexpectedly blocked, it's worth
checking any correspondence from the company for explanatory messages, such as
a notification of a change in record keepers. If you find no such notices,
Hebner advises calling the provider and asking why you don't have access to
your money and when you can expect that condition to change.
If, for instance, external circumstances force you to wait
for a short period before you can access your funds, you should have that
clarified and, if possible, have the terms put in writing. If no external
circumstances exist and your previous employer still denies you access without
proper explanation, you should address your case to the Department of Labor or
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