Your Company Was Acquired!  What Happens To Your 401(k) Money? - Part II

By Clifton Linton
Writer, mPower

Click here for Part I

Three Possible Outcomes

Given the fact that each 401(k) plan is unique, there's no one-size-fits-all way for employers to deal with the plans of companies they acquire. "There are so many small technicalities involved. There are 100 different variables," Kravchick said.

Still, there are three broad paths employers are likely to choose from, says Laura Stern, director of institutional investments with TwentyTwenty Advisors Inc., a 401(k) consulting management firm.

1. Your plan is terminated.

   This is the most common choice among employers, Lewis says.

   In this case, the plan is closed. All the employee contributions, vested employer matches and profits are returned. Employees may choose to roll the money into a rollover IRA or cash out. If the new corporate parent's plan allows it, they may be allowed to roll their money into that 401(k) plan.

   One point: if a company wants to terminate a plan, it needs to be done before the acquisition is complete, Fletcher says. "If you do that, (employees) have free rein with … the money," he said.

   The law says that if an employer terminates a plan after acquisition, it must wait 12 months before opening a new 401(k) plan.

   That's why Fletcher decided to terminate National Retirement Planning's 401(k) plan prior to the Century Business Services acquisition. When the plan was closed, Fletcher gave the other 11 employees in the company the chance to roll their money into an IRA. All of them took that option, he said.

   It can take anywhere from a few weeks to seven months to close a plan, Fletcher says. During that time, you won't be able to make contributions to the plan, but your account should continue to earn interest.

2. Your plan is retained.

   In other words, the new employer decides to let the old plan continue to operate. This option is used less frequently and "tends to happen when there are different benefits approaches," Stern said.

   Say one employer allowed post-tax contributions to the 401(k) plan and the other didn't. Combining the two might cause the final combined plan to lose its IRS qualification if any of the post-tax contributions were improperly made to the first plan. Instead of closing the plan, the employer may decide to retain it.

   In this situation, the employer may decide not to permit new employees to enroll in the old plan. They would be directed to the plan of the new parent company.

3. The two plans are merged (the acquired plan is rolled into the new company's plan).

   In this situation, the retirement money isn't distributed to the employees. It's automatically rolled into the new merged plan and the participants have no other alternative, says Ted Benna, the creator of the first 401(k) plan.

   Combining two plans can take anywhere from a week to several months, and the plan is frozen during that time. Your money continues to earn interest, but you can't make contributions or withdrawals. This tends to be the least popular option because of the complexity of combining the detailed rules and benefits of two plans, said Stern.

What You Can Do

If your plan is terminated, you should expect to receive a check for the amount of your contributions, employer contributions and any investment profits. Note: all employer contributions become fully vested when a plan is terminated regardless of your years of service.

At this time, you have two choices. First, you may decide to roll the money into an IRA and continue to invest it. You may want to open an IRA ahead of time and arrange to have a trustee-to-trustee transfer and avoid the worries of paying withholding tax.

Fletcher did this when National's plan was closed.

Alternately, you could cash out. About 65% of workers do this when their plan is terminated. However, this option comes with a heavy penalty. If you're under the age of 59½, you will have to pay an early-withdrawal penalty as well as any appropriate tax on your profits and original contributions. While having the money might be nice, you should make sure you have adequate retirement savings.

Regardless of what happens to your employer, your greatest resource is the plan administrator. This person should be able to tell you if you may take a distribution or can roll into the new employer's plan, Kravchick says.

If your employer offers a new 401(k) plan, you might want to see if you could roll your money into it. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.