What Are the Unemployment Compensation Amendments of 1992?

The Unemployment Compensation Amendments of 1992 are a law in the United States that allows an employee who loses their job to roll over their employer-sponsored retirement savings into a qualified retirement plan, such as an individual retirement account (IRA), without tax consequences. The provision allowing former employees to do this was included among other amendments to the Emergency Unemployment Compensation Act of 1991, which at the time extended emergency unemployment benefits.

Key Takeaways

  • The Unemployment Compensation Amendments of 1992 are a law that allows an employee who loses their job to roll over their employer-sponsored retirement savings into an individual retirement account (IRA), or other qualified retirement plan, without tax consequences.
  • Employers must give employees the option of a direct transfer to the new account.
  • Because direct transfers do not count as a distribution, the amount transferred is not considered taxable income.
  • Employees who choose to receive the funds directly, not as a direct transfer, are subject to a mandatory 20% withholding tax of the withdrawal amount.

Understanding the Unemployment Compensation Amendments of 1992

Under the Unemployment Compensation Amendments of 1992, if you lose your job, then your employer is required to provide you with the option of rolling over your retirement savings in a company-sponsored plan, such as a 401(k), to an IRA or other qualified retirement plan account that you choose.

The law allows employees the option of trustee-to-trustee transfers. In a trustee-to-trustee transfer, also called a direct transfer, the funds are not paid directly to the account holder, nor does the account holder receive a check made payable to the new account. Instead, the two financial institutions facilitate the transfer on your behalf.

With a trustee-to-trustee transfer, no taxes are withheld from the amount that is transferred. Also, the transfer does not count as a distribution, which means that the amount is not considered taxable income.

If you choose to receive the funds in a check, then there is a mandatory withholding of 20% of the withdrawal amount that is paid to the Internal Revenue Service (IRS) to cover federal income tax, regardless of how much you may ultimately end up owing. For example, if you effectively only owe 12% at tax time, this means you’ll have to wait until you file your taxes to get that 8% back.

If you lose your job, then withdrawing funds from your employer’s retirement plan as a lump sum before you are at least age 59½ should be a last resort. In addition to tax penalties, you will lose part of your nest egg and diminish its power to accrue earnings on a tax-deferred basis. This could put you significantly behind in saving for retirement.

Special Considerations

Most 401(k) plan rules state that if you have less than $1,000 in your account, then an employer is automatically allowed to cash it out and give the funds to you directly. In general, if you have $1,000 to $5,000, then your employer will put it in an IRA if you don’t tell them what do do with the funds.

Some employers allow you to leave your retirement savings in the company’s plan even after you have left if you meet a minimum balance requirement—typically more than $5,000 in your account. But keep in mind that if you leave your account with your old employer, then you will no longer be able to contribute to it.

If you choose to move your retirement savings to an IRA, then you will have a wider range of investment choices than with the employer’s plan. Typically, 401(k)s offer several mutual funds, ranging from conservative to aggressive, from which an employee can choose. With an IRA, most types of investments are available.