You are most likely to experience a 401(k) freeze following a merger where the new company must determine what to do with the 401(k) plan it has acquired. During this process the employer temporarily halts all new plan contributions and withdrawals, hence the term “frozen.”

Key Takeaways

  • 401(k) retirement accounts may be “frozen” by a company’s management so that new plan contributions and withdrawals are halted temporarily.
  • During this time any investments in the 401(k) account will continue to gain or lose value with the market.
  • A frozen account may occur when two companies merge, a company changes 401(k) providers, or your plan provider is terminated.
  • Plans may be frozen for extended periods of time, even indefinitely in some cases, in which case you can roll over your frozen 401(k) into an eligible IRA.

What a Frozen 401(k) Means for You

If your 401(k) has been frozen by your company’s new management, you will still retain all of the rights you had prior to the freeze. Your existing investments still grow or shrink based on their market performance, and your retirement savings will maintain their tax-advantaged status. The only difference is that you cannot add new funds or make withdrawals from your account.

In most cases you can change the composition of your existing retirement portfolio and shift assets from one investment to another. You also continue to receive statements in accordance with ERISA guidelines. 

What May Happen to Your Frozen 401(k)

There is no legal restriction on the length of a retirement plan freeze. Your 401(k) plan may be frozen indefinitely until the new employer following a merger decides what to do with it. Your new management has three primary options with recently acquired 401(k) plans.

Merger Into Another Plan

Your new employer may choose to merge your plan with its own 401(k) plan. In this scenario your retirement assets are rolled into its 401(k) plan, after which your new plan is unfrozen. As 401(k) plans are often very different and highly complex, this can take a long time to execute properly.

Termination of the Plan

This cannot be completed until the company receives a letter from the Internal Revenue Service (IRS) indicating that everything has been properly handled. After termination, your contributions, vested matches, and profits are all returned. Assuming that your new employer’s 401(k) plan allows for rollovers, you can opt to have your retirement funds rolled into that plan.

Continuance of the Plan

In this case, it is likely that any new employees at your company will be directed into the new company’s 401(k) plan, while existing employees from the acquired company may continue to access the legacy plan.

Rollover to an IRA

You can also opt to move your funds into a rollover IRA instead of accepting any of the above three scenarios. If you choose to use your old 401(k) money to establish a rollover IRA, you keep the tax-advantaged status of those funds and are not charged an early withdrawal penalty. To protect against tax penalties, be sure to arrange for a direct (trustee-to-trustee) transfer of your funds.

Frozen 401(k) plans are still required to pay RMDs once you reach the age of 70½.

How Required Minimum Distributions Are Handled

If you have reached the age for required minimum distributions (RMDs) from your 401(k) account and your plan is frozen, your plan sponsor still pays out RMDs. If this does not happen, request your RMD and document your efforts to avoid IRS penalties, which require that minimum distributions occur after age 70½.