You have a 401(k) plan which is set by your company, and you are also facing the situation when there are all the possibilities that company is closing, shutting down or at the door of bankruptcy. So, what happens to your 401(k) plan in case your company closes down?
The very tense situation for you and you start worrying about your 401(k) plan and what is going to happen to the money you are having in your account, and that is very reasonable thought.
Here we will discuss what you should expect in this situation and what should be your next steps.
The Money In Your 401(k) Account Is For You Only - Whatever May Be The Circumstances
The money in your 401(k) account usually hold different types of contributions, and the contributions made by you in your 401(k) plan is called 'salary deferral contribution.' So the money which you are contributing will always belong to you and for you whatever may be the circumstances, and in any crisis, the company can't use this money.
So technically and by law, the money is owned by you only, a different administrator manages most of the 401(k) plan, and they restrain your employer from using or taking that money.
The company also put money in your 401(k) plan in the form of contributions, and there are two types of contributions made by the company - matching contribution or profit sharing contribution.
So, some of the money from these contribution belongs to you and some may not. Usually, these contributions are subject to 'vesting schedule' which means you can own the longer you work with the company, the more of the money from the account.
It does not matter what the contribution made by your employer if you in 100% vested then the money will belong to you only and will be secured for you is.
What Portion Of The Money Is At Risk?
The money which you put in your 401(k) plan in the form of contribution, from your paycheck your employer withholds the money and transfer it to your 401(k) plan. It may happen that your company has withheld the money and before they send it to your 401(k) plan the company got closed or filed bankruptcy, then that much amount of money will be at risk.
In the case of matching contribution or profit sharing contribution, your employer should deposit the funds by their tax filing deadline in addition to extensions, and can be late as the October of the year. And again the company closed or filed bankruptcy before they make the deposits you may not receive that portion of the money which is owned by you.
It may also be possible that you own the company stocks, but the company is now of no use, so that part of the money in the form shares will also be of no use for you. You should always diversify your stocks and don't just have the stocks of your own company only.
If Company Shuts Down - Having 401(k) Plan is Subjected To Any Taxes or Penalties?
In case your company closes down, files bankruptcy and also closes the 401(k) plan, but still, you have many ways out there which you can adapt to keep growing your money for the future and without having to pay any taxes or penalties at that time.
The best thing which you can do is called - 'Rollover' through which you can move your 401(k) plan to your IRA account. If you 401(k) plan is being terminated and your employer no longer exists then no need to pay any taxes or penalties during the rollover.
One more thing which you can do is that you have started working with the new company and they also have their 401(k) plan then you can easily transfer your old 401(k) plan to your new 401(k) plan. It is always advisable that you contact the plan administrator and get help from him to get all the paperwork done and you can easily transfer your 401(k) to the new one.
One last option also available to you is that you can cash out of your 401(k) plan, but this option is rarely advised. If you take cash out of your 401(k) plan then maybe you are subject to early withdrawal penalties and other taxes on the amount which you have to withdraw, as 401(k) plan is considered for your retirement income and early withdrawal will be considered as distribution.
One more thing you should understand the money in your 401(k) plan is creditor protected, and, when you take out the cash from your account, you will lose this protection. Cashing out is not a good idea you are falling for taxes as well as you are losing the chance to grow the money for your retirement. It is always advisable to roll over your 401(k) plan or transfer it to your new 401(k) plan.
In Case You Had Taken Loan Through Your 401(k) Plan
In case you have borrowed a loan from our 401(k) plan then this is the thing which you should worry about, as you have to repay the remaining balance loan amount within the sixty days, and if you fail to do so, it will become the taxable income and will be considered as distribution.
This type of distribution is reported at the end of the year and on the 1099-R tax form. If you have still not attained the age of 59 and a half, then you will also need to pay 10% as an early withdrawal penalty in addition to the income taxes.
In Case You Are Not Finding Your Old 401(k) Plan
There is always a possibility that you must be having money in your 401(k) plan from the employer for which you were working in the past, and you are not able to find the employer. Then what are other options which you can employ?
The first place from where you can start your search is 'The National Registry' as there is always a possibility that your previous employer has listed you there as a 'missing participant.' You can also continue your search in labor's department - 'Abandoned Plan Database' if you can't find it in the first option.