My Company Went Out of Business: What Should I Do With My 401(k)?

Every year, thousands of businesses close their doors. Employees and their employers who go through this experience are left with several balls to juggle. This includes securing health coverage, starting the search for a new job, and dealing with the retirement account sponsored by their former employer. Let’s review what you can do with a 401(k) account when a company goes out of business, so you can better futureproof your retirement savings strategy.

What happens to my 401(k) if the company is dissolved or bankrupt?

The Employee Retirement Income Security Act (ERISA) protects your 401(k) account by requiring your employer to hold plan assets in a trust account for your benefit. In the event of bankruptcy, federal law states that your employer’s creditors can’t make a claim on retirement plan funds.

This means that all of your past contributions withheld from your paychecks that have been deposited in the trust belong to you and are protected by federal law. Since all employee contributions are immediately vested, you have non-forfeitable rights over your funds in an employer-sponsored qualified retirement plan account. In addition, any employer contributions made to your account become 100% vested upon termination of the plan, which may occur during a dissolution or bankruptcy event.

What about unpaid 401(k) loans?

There are many reasons why it may not make sense to take a loan from your 401(k), but here’s another one. If your company goes out of business, the outstanding balance on your 401(k) loan becomes due upon the plan termination date, or the date you no longer work for the company (whichever comes first). 

If you’re unable to pay back the loan by the deadline, the unpaid portion, plus accrued interest, becomes taxable income. This triggers applicable income taxes. Those under age 59 1/2 may also have to pay a 10% early withdrawal penalty from the IRS. Certain states may charge additional income taxes and penalties. All of this could leave you with a large tax bill for that year’s tax return.

Whatever portion you don’t pay back cannot be rolled over (more on this below) to a new employer-sponsored retirement plan.

What are my options with my 401(k) after the company goes out of business?

When a company goes out of business, the plan must terminate, since the plan sponsor no longer exists. Therefore, you must take a distribution or you risk being forced out of the plan into an IRA of your sponsor’s choice. Some options you can take include:

1. Roll over to a new employer-sponsored 401(k)

If you’re able to find a new job offering an employer-sponsored 401(k) or other qualified retirement plan accepting rollovers, you may want to complete a rollover of eligible funds into the new plan. A rollover is one way to keep deferring income taxes until retirement age, and can be a good course of action if you want to consolidate all of your retirement accounts. 

2. Roll over to an IRA

Unsure if you’ll be able to secure a new job that will offer a retirement plan? Completing a rollover into a traditional or Roth IRA could be a wise choice. One advantage of a traditional IRA is that many financial institutions, including banks and credit unions, offer these types of retirement accounts, so you’ll have many options to choose from. Additionally, most IRAs accept rollovers from 401(k)s.

3. Do an indirect rollover

With an account balance under $1,000, your employer can opt to cash out your 401(k) without your input and mail you a check, withholding the mandatory 20%. In this scenario, you can move these funds to a new employer-sponsored 401(k) or an IRA within 60 days of receiving the funds. You can also choose to make up any federal and state taxes withheld. Anything you indirectly rollover can cancel out your taxable event from receiving the cash directly.

4. Combination approach: Roll over some funds and take a cashout

Sometimes, when it rains, it pours. If you experience another unfortunate event, such as a family emergency or a large medical bill, around the same time your company closes up shop, you would be happy to find out that you can mix and match between your options. For example, you could do a direct rollover of 80% of your 401(k) funds and cash out the remaining 20%.

Keep in mind that your plan administrator is required to withhold 20% federal withholding from your cashout, so you won’t see the full amount. Still, it may provide you with some peace of mind and cover some or all of those unexpected expenses during a difficult time. 

While your distribution is subject to applicable income taxes, you could avoid the 10% early distribution penalty if you meet an exception.

How to find an old 401(k)

Historically, tracking down old 401(k) accounts could feel overwhelming and time-consuming, often requiring you to reach out to former employers and coordinate the rollover process yourself. Human Interest, in partnership with Capitalize, provides an easy way to search, find, and move previous retirement accounts. Rollover Concierge™ allows you to gain full visibility into where your funds are and when your rollover has been fully processed—all at no cost.

The bottom line

The end of your previous job doesn’t mean the end of your nest egg. Most of your contributions are protected by federal law, and you’ll have chances to roll over those funds to a new retirement account. Be sure to evaluate all of your options and understand the rollover process to prevent triggering taxes and potential penalties.