Can I Lose My 401k If My Company Goes Out of Business?

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Can I Lose My 401k If My Company Goes Out of Business

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If a company goes out of business, declares bankruptcy, or is acquired by another company, employees may be worried about the fate of their 401(k) retirement assets. Does the 401(k) money just disappear or is the money protected?

If your company goes out of business, your 401(k) account is protected under federal law, and creditors cannot claim the money saved in employee 401(k) accounts. The 401(k) retirement money is held in a trust or in insurance contacts, and neither the employer nor creditors will have access to these funds.

My company has declared bankruptcy and is going out of business, what happens to my 401(k)?

When a company declares bankruptcy and ceases operations, the fate of your 401(k) depends on the rules governing your retirement plan.

Generally, 401(k) plans enjoy some level of protection from creditors under federal law and are protected by the ERISA Act of 1974.

If your company files Chapter 7 Bankruptcy, and its assets are liquidated to pay creditors, your 401(k) assets will remain separate from the company assets. The 401(k) plan may be transferred to another 401(k) provider or become available for rollover, but the funds will remain invested and available for distribution.

If your company filed Chapter 11 Bankruptcy, where the company is allowed to reorganize and continue operating as it plans how to pay creditors, the fate of your 401(k) plan may depend on what the company decides to do with the 401(k) plan. If the company decides to continue its retirement plan, the funds will remain invested in the plan, and available to you.

If the 401(k) plan is terminated as part of the bankruptcy process, plan participants may have the option of taking a distribution or rolling over to an IRA or another employer’s 401(k) plan. If you choose to take a distribution, note that you will be subject to income taxes and an additional 10% penalty if you are below age 59 ½. 

Is my 401k protected if my employer goes out of business?

Your 401(k) is protected under federal law, and employers are required to keep the money separate from the company assets. All 401(k) contributions must be held in a trust or an insurance contract. Hence, if your employer goes out of business, they won’t have access to the 401(k) money.

While your 401(k) money is protected, there are certain circumstances when you may not receive all the 401(k) money. They include:

Some funds have not been deposited

Employers are legally required to deposit 401(k) contributions into the plan within 15 days after the end of the month when the contributions were withheld. However, companies with less than 100 401(k) participants have 7 days to deposit plan contributions. If the company declares bankruptcy before depositing the contributions, you could lose this portion of the contributions.

Unvested employer contributions

Most employers have a vesting schedule, which requires employees to work for a certain number of years to get 100% of the employer’s contributions. For example, if your employer has a 5-year vesting schedule, you won’t get full access to the employer matching contributions until you complete 5 years of employment in your company. If the company declares bankruptcy before you are fully vested, you might lose the unvested portion of your employer match.

You invested in company stock

If you had invested part of your 401(k) money in the company stock, the value of the stock may become worthless if the company declares bankruptcy and goes out of business. However, if the company is instead acquired by another company, your company stock might be converted to stock in the new company equivalent to the value of your old stock.

Are 401ks FDIC-Insured?

The FDIC insures deposits held in banks, credit unions, and some savings institutions up to a certain limit. However, 401(k) accounts are not the same as bank deposits, and they are not FDIC insured, except in limited circumstances.

Although 401(k) plans are not FDIC-insured, they are protected by the ERISA Act, which regulates retirement plans in the United States. Additionally, 401(k) investment options may be subject to SEC and DOL regulations.

The only instances when FDIC insurance may apply to 401(k)s is with self-directed 401(k) plans, such as a Solo 401(k) plan. These plans are set up for one-person businesses, but large employers may also offer a self-directed 401(k) plan to their employees. Self-directed 401(k) account holders have the option of investing in FDIC-insured investment products like a Certificate of Deposit (CD) or a money market account, which gets FDIC coverage.

How to Manage a 401(k) if Your Company Closes

Once you get information that your employer is going out of business, you should contact your 401(k) plan administrator so that you can be updated on any changes related to your 401(k) plan. You provide them with your current contact information so that you can continue to receive plan communications.

If the plan administrator is unreachable or is not available, you can contact the US Department of Labor’s Employee Benefits Security Administration (EBSA) either via phone at 866-444-3272 or via the Official website to provide information on the status of your 401(k) plan.

If the company goes out of business and terminates the 401(k) plan, you will have the following options:

Roll over to new employer’s 401(k)

If you have a new employer, check if they have a 401(k) plan, and ask if they allow 401(k) rollovers. If the new 401(k) plan accepts rollovers, request a direct rollover from your old 401(k) to the new employer’s 401(k) plan. You can also request an indirect rollover, where the plan mails you a check with your 401(k) balance, and you will have 60 days to deposit the full rollover amount to a qualified retirement plan.

Roll over to an IRA

You can choose to roll over the money from your old 401(k) to a traditional IRA or Roth IRA. Rollovers from a traditional 401(k) to a traditional IRA do not trigger income taxes, and your money will continue growing tax-deferred until when you start making withdrawals. However, if you roll over a traditional 401(k) to a Roth 401(k), you will owe income taxes on the full rollover amount.

Take a distribution

If you need money to help you pay your day-to-day expenses, or you want to make a big purchase, you can choose to take a distribution of your entire 401(k) balance. However, this option should be a last resort, since the distribution will be subject to income taxes at your tax bracket rate, and a 10% early withdrawal penalty if you are younger than 59 ½. 

Conclusion

If your company has declared bankruptcy and is going out of business, your 401(k) plan will be protected from creditors and any legal claims. Generally, employers are required to keep the 401(k) assets separate from the company assets, and this means that your 401(k) won’t be affected if the company goes out of business. The 401(k) money is held in trusts or insurance contracts, and creditors won’t get access to these funds when determining the value of the company’s assets.

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