When you leave an employer, you have important decisions to make regarding your 401(k). Your options include keeping it with your former employer, rolling it over to your new employer’s 401(k), transferring it into an individual retirement account (IRA), or cashing it out. However, each option has its pros and cons, and may potentially have tax implications.
Those options, of course, all assume you have access to the funds in your 401(k) account. However, what happens if your employer denies that access when your employment ends? And why might that occur?
Vesting May Limit Access to Some 401(k) Funds
Any personal contributions you have made to a 401(k) plan provided by your employer, and the earnings thereof, are legally yours and cannot be withheld by your former employer.1 However, that does not mean that your entire 401(k) balance is yours. If your former employer made matching contributions, it is possible you may not have been on the job long enough for those company contributions to fully vest.
Being fully vested means that you have rights to the full amount of a certain benefit, in this case, the benefit of your former employer’s contributions to your 401(k) account. Not all companies have vesting schedules, and it is important to check if your previous employer had one. If so, make sure you understand the timeline and stipulations for being fully vested.
For example, some employers have a vesting cliff, meaning you need to stay with the company for a specific amount of time to become 100 percent vested in the employer contributions. Leaving early may result in you receiving none of the matched contributions.
Assets May Be Temporarily Frozen
There are legitimate reasons why you may be temporarily blocked from accessing your vested 401(k) funds. For instance, blackout periods can occur when plans change professional employer organizations (PEO) or investment options, or a company merger takes place, causing your assets to be temporarily frozen.
In most instances, you will be notified in advance if such situations occur. While there is no legal time limit on how long an employer or a former employer can freeze your 401(k) account, companies usually try to rectify these situations as soon as possible. Keep in mind that even during the blackout period, your money stays invested, and your account can continue to grow.
Recently terminated employees may be subject to different rules regarding access to their plans. These rules are often tied to resolving any financial issues around a worker’s departure—an outstanding loan, for example. If you’ve taken out a 401(k) loan and left your job, you’ll be given a specified amount of time to pay it back.
Finally, an account lock may occur due to suspected fraudulent activity. While fraud alerts are intended to protect account holders, they may sometimes be unaware of the alert and will need to call customer service to release the hold.
What to Do
If access to your funds has been blocked, you should have received correspondence via mail or email from the company or 401(k) administrator detailing the circumstances and expected time frame for the blackout period. If you didn’t receive any notification before the funds were blocked, you will need to contact your former employer or plan administrator to determine why the funds have been blocked.
If extenuating circumstances require you to wait before you can access your funds, this should be clarified and, if possible, put in writing. However, if no extenuating circumstances exist and your previous employer still denies access without proper explanation, you may consider contacting the Department of Labor or seeking advice from an attorney.
Frequently Asked Questions (FAQs)
Can a Company Take Away Your 401(k) After You Quit?
No. Any contributions that you make to your 401(k) and any gains on those contributions are 100% yours, and your former employer has no legal authority to take those away for any reason. If your employer has contributed to your 401(k) and you leave before you are fully vested in those contributions, your employer has the right to withhold the unvested portion based on the company’s vesting schedule.
Can I Keep My Former Employer’s 401(k) Plan After I Leave?
Yes. If the account balance is over $5,000, you can leave your funds invested there even after you leave. In cases where that plan has very low fees or unique investment options, it may be a good idea to keep those funds there. If you have less than $5,000 contributed, your former employer may require you to move it. In that case, you can cash out the funds or roll your 401(k) over into an IRA or a 401(k) plan with your new employer. However, keep in mind that cashing the 401(k) out will likely require you to pay penalties and taxes.
How Do I Roll Over a 401(k) From a Previous Employer?
If you choose to roll over your 401(k) from a previous employer, you have a few options. You can roll it over into a 401(k) plan at your new employer or roll it directly into an IRA. You will need to contact the plan administrators for your current and future 401(k) to start the rollover process, or open an IRA account to roll the 401(k) assets into.
If possible, it is best to work with your old employer’s plan administrator to directly roll the funds into the new account. However, if you have to manually move the funds, make sure to submit them to your new 401(k) or IRA within 60 days to avoid any tax implications.
The Bottom Line
If you part ways with your employer and find yourself locked out of your old 401(k), don’t panic. It typically happens for one of two reasons: You weren’t fully vested in the assets, or the assets have been temporarily frozen. In either case, getting in touch with your former employer or 401(k) plan administrator should help you quickly resolve the issue.