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). 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. 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. "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 in Encino, Calif., 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, if applicable."
Nevertheless, Mark T. Hebner, founder and president of Index Fund Advisors in Irvine, Calif., 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."
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. This could result in loss of the account. As Jeremy E. Portnoff, MSFS, CFP®, CIMA®, founder of Portnoff Financial in Metuchen, N.J., and Mission Viejo, Calif., 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.
Assets May Also Be Temporarily Frozen
Access to your funds, vested or not, also may 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 plan. 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 back.
What to Do
If access to your funds is blocked unexpectedly, it's worth checking any correspondence from the company for such explanatory messages 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 an attorney.