What happens to 401K if the employer goes bankrupt and the company shuts down?

Q: I have been working at this company for about five years now and I have a 401K plan through them. I have been hearing that the company has been making losses for quite some time now and that they are on the verge of bankruptcy. If they do shut down, do I lose my 401K savings? Should I withdraw all the funds right now, to play safe? Please advise- Stephen, Dallas.

Ans.: Stephen, there is no need to panic and there is absolutely no need to withdraw your money from the 401K plan. In fact, I recommend that you DO NOT do this because you stand to lose the range of benefits that come from investing in this plan which comes with a clear tax benefit.

The 401K account that employees like you have is not held by the company itself. The company’s management or accounts personnel have no access to your money in this account either. In case of a company facing a bankruptcy, there is no way for anyone, except, the account holder, that is, you, in this case, to utilise the money in the 401K or divert it in any way.

Now what happens if the company does shut down? Well, the 401K plans will most likely be terminated. That does not mean your money is gone. All you may have to do, if this happens, is to roll over the savings that you have accumulated in this account to another one. The smart move here is to roll the cash over into another retirement savings account that offers tax benefits. An IRA is a good option for you because it lets you avoid paying taxes on the sum and you can also avoid the premature withdrawal penalty by simply switching over to a traditional IRA. Also, you do want to continue saving for your future, right? The IRA gives you the perfect opportunity to continue doing so.

What you should be doing right now to safeguard your interests and avoid anxiety is keep track of your 401K. Get your HR department to give you information about the 401K account so that you can create a login and access it online at your leisure. Also do some groundwork about other retirement savings plans that you may be able to opt for, in case this one is closed down because of company closure. If your plan is held with providers like www.401keasy.com, this should not be a problem at all because the focus here is on user friendly interface, customer service and ease of use!

Getting the most out of your plan

Hi, I’m Richard and I run a small IT services company. I have a small group of employees working for me and recently, I decided to set-up 401(K) accounts for them. While inquiring about 401(K) plans for this purpose, I came across something known as a Safe Harbor 401(K) plan. What kind of plan is this? Could you please care to explain?”

Hi Richard,

It’s great to hear from you and like we always say, we’re simply here to help people like you. Now coming to your question, Richard, we would like you to know that this one of the more rare topics we come across. Wondering why it’s so rare? Well, it’s rare because the Safe Harbor 401(K) option is something that most people don’t opt for.

It’s an investment option that only complicates things, especially if you’re running your own business. So, instead of making you guess, we’ll just get down to helping your figuring out what goes on with a Safe Harbor 401(K). After you get a fair idea about the plan, you can go ahead and make a decision about whether this plan suits your needs or not.

The first thing about a Safe Harbor 401(K) is that the business owner is expected to make necessary contributions as matches. At first, these plans might seem great, but, if you have fewer than 25 employees or are okay with making the necessary employer contributions, you will have to dig deeper.

There are a few benefits to this type of 401(K) plan. You can make maximum contributions to your own account. However, you are also required to make matching “safe harbor” contributions to the accounts of your employees as a percentage of their compensations. What this means is that both, you and your employees, can increase tax-deferred contributions without being subject to the restrictions normally imposed on a traditional plan that does not need matching contributions.

The key contribution features are:

  • The maximum salary deferral contribution can be made by all participants.
  • The contributions can either be Roth deferral contributions, pretax, or both.
  • The overall contributions from employers and employees should not be above $ 52,000 or 100% of income per participant.
  • The employer must match employee contributions i.e. 100% of the initial 3% of salary and 50% of the remaining 2% of salary. Or else, they must offer a non-elective contribution i.e. 3% of salary for each eligible employee.

Here are a few things to consider:

  • Safe Harbor contributions and employee deferral are instantly vested.
  • The plan can be a complex one. You will need an administrator to oversee compliance, record keeping, testing, IRS Form 5500 filing, and maintenance.

These are some of the core features of a Safe Harbor 401(K). To access more detailed information, we suggest that you take a look at www.401keasy.com. 401K Easy has all the information you need about Safe Harbor plans.

Getting the most out of your plan

Hi, I’m Janice. As of this writing, I am in a financial soup. I need money urgently to make some payments and I was thinking whether I can do a hardship withdrawal from my 401k to get a cash infusion. However, I am not entirely sure of the ramifications. Can you please advise me on the same?

With the next presidential election approaching, it is difficult to tell what turn the economy is going to take. As the strained times continue, doing a hardship withdrawal from your 401k account is very tempting. Before you tap into the retirement savings, you need to understand the rules and have a clear idea of the consequences.

According to the IRS guidelines, a hardship withdrawal must only be made in the event of a heavy and immediate financial need. Moreover, the amount you withdraw must be absolutely necessary to fill the financial need. The employee’s need also includes the need of a dependant or a spouse. A withdrawal is regarded as heavy and immediate if you make it for any one of the following reasons:

  • To prevent foreclosure or eviction from your primary residence.
  • If you have expenses related to the purchasing of a primary residence, not including mortgage payments.
  • Education expenses (post-secondary) for the upcoming 12 months either for you, your spouse or your dependants.
  • Improvements or qualifying expenses for your primary residence.
  • Funeral expenses.

While the IRS rules make an allowance for the aforementioned withdrawals, it is not necessary that your plan allows them. Your plan provider can also limit the kind of hardship withdrawal that they allow. Withdrawing money from the retirement account sounds easy, but there are substantial drawbacks to it.

In a lot of the cases, such withdrawals are subject to taxes and 10 percent penalty, unless you meet certain criteria. In some of the cases, if an employee utilizes the hardship withdrawal, it restricts the investor from making any further plan contributions for six months or more.

Apart from the immediate costs of getting your hands on the funds from your retirement account, there are certain long-term consequences to the action that you will not realize for some time to come. The money that you remove from your account will no longer receive the benefits of compounding and growth over time. This is also applicable for contributions that are made to the plan in the restricted period following a withdrawal.

Desperate time call for desperate measures, but before you dip into your 401k to ease your financial bind, consider the immediate costs and the long-term impact on your retirement goals. If you want to get more in-depth information on your 401k, visit 401keasy.com. It is the most comprehensive 401k resource on the internet and you are sure to find answers to all the tricky questions you have.

Feature-rich 401k at Affordable Cost

I run a small carpentry workshop at home. I want a 401k plan that is pocket friendly but gives me more than a bare bones version. In particular, I want good security and sufficient investment options. Am I asking for the impossible?-Alfred J. Ryals, 3912 Pleasant Hill Road, West Palm Beach, FL 33401

Alfred, you are definitely not asking for the impossible! In fact, you are just trying to make sure that you have a perfectly adaptable 401k that safeguards your savings in the best possible way. What you should look for is a plan that offers you a good choice of no- load mutual funds so that you effectively diversify your investment. In addition, you should also be ensuring that the plan you choose is not pricey when compared to similar plans in the market.

Today, there are many such plans available for small business owners like you. At http://www.401keasy.com/, you will find that ‘ultra low cost’ means no surprises in the form of hidden fees, commissions and asset-based charges. Since 401k Easy also gives you an unlimited choice of  no- load mutual funds to pick your favorites from, this could be the best option for you. Its 401k is feature packed and you are sure to find right here all the functionalities that big company plans usually have, with the bonus that you can get them all within your budget. Don’t hesitate to compare prices with other plans before you make your choice.

Another aspect to check when you are doing your comparison shopping is whether all the 401k suites on your ‘list of possibles’ give you great security features. The 401k Easy plan comes with secure online administration. This makes the plan doubly attractive because you don’t want sensitive personal information about your retirement savings strategy leaking out into cyberspace or among your competitors.

While you are at it, do check out if a demo version is available so that you can actually get a hands- on feel for the 401k suite. You can check for yourself if it is easy to use, intuitive and clutter free. Remember that you will need to update information on a monthly basis. A complicated 401k package will need a lot of time and effort-investment month after month simply to plug in the latest figures. That can get really tedious after a while and the extra complications only increase the risk of human errors cropping up. Go for simplicity, security and a good range of investment options.

Taking Loans from a Solo 401k

I run my own florist’s shop where the only employee is my wife. Can I set up a Solo 401k plan for my business that I can take a loan from in future? I do hire some help occasionally but have no other full time employees as of now.- Herman F. Stout, Pullman, WA 99163 

Businesses like yours that do not employ full time employees can set up a Solo 401k or Self Employed 401k, as it is also called. The fact that your wife is a full time employee does not prevent you from opening this retirement benefit plan. To all intents and purposes, the IRS considers your wife as a partner in your business rather than an actual employee.

You can take a loan from this account at a future date if you have a financial emergency. There are some stipulations and restrictions regarding taking loans in this way. A most important one is that you have to limit your loan to half of your account balance in the 401k account. Plus, the total loan should not exceed $50,000. When you repay the loan, the money goes back into the account and so does any interest you pay on the loan. In effect, through the Solo 401k loan you give yourself a loan and pay yourself back too.

Making sure that you do repay on time is very critical because you would end up paying penalties otherwise. If you fail to follow the loan repayment terms you may even end up paying tax on the amount you have withdrawn. A good way to keep track of your loan is to use a DIY 401k suite like http://runityourself401k.com/. With this software package it is an easy task to view your account status, get monthly statements as well as manage the account by just investing a few minutes of your time every month.

Employee Details Required for 401k

My friend runs a non profit organization and he recently set up a 401k plan for his company quickly and easily. I own a designer clothes shop in Harlingten. Can I set up my 401k the same way? What details about my employees will I need to collect to establish the account?- Misty Young, Texas.

Misty, setting up a 401k for your small business is pretty much the same as doing it for a non profit organization. Today, the entire process is very easy and it can actually be completed within a few hours at the most. You can sign up with a 401k provider like Vanguard or Fidelity to set up your plan. Most small businesses, however, prefer to use a DIY plan like http://lifecycle401k.com. These plans can be set up quickly right from the comfort of your home or office. You can manage the plan and carry out monthly updations in minutes and keep track of the plan easily too.

You also save a lot of money with such DIY plans because there is minimal administration cost. Your employees can keep tabs on their 401k account status easily with such plans too which makes it easy for them to switch investments or keep track of loans they have taken. Look for DIY suites that come with a demo so that you can try out the package before you actually sign up for it. Check if it is user friendly and if it has all the investment choices you want to include for your employees.

To set up the plan you will need to enter some information about your employees and also your company. For example, details of compensation drawn by them, their designation, the date of hiring and similar data will be required. You can decide if you want to make matching contributions and if so, how much, when you set up the plan.

Remember that you can always make contributions without specifying so in the plan document. Or, you can change your plan document later on to include employer contributions. If your business is just starting up then you may want to avoid committing yourself to a specific amount of employer contribution right away and simply add the provision later on.

Customizable 401k Plans

Why should I choose a 401k plan that offers customization? Where can I find affordable plans that can be customized? Marvin M. Huerta, Reeves, LA 70658, runs a bakery supplying home baked products to his neighborhood.

Marvin, a customized plan is the best choice when you want to set up a 401k retirement savings scheme for your small business. When you employ people, you cannot choose only those whose investment ideas match with the rest of your employees. Every employee will have a different savings plan and varying risk appetites. The same investment avenues may not be right for all employees. Giving your employees the freedom to invest the funds in their 401k however they please across a range of options that are suitable for them lets them control how and how much they save for their retirement. A customized plan lets you determine the kind of investments you want to make available.

Customization also gives you a great deal of control over what is and is not available for your employees. For instance, you can choose a 401k plan that does not allow loans if you want to ensure that your employees save the maximum possible for their retired years. You can even choose to do away with employer contributions if you want to opt for a performance related contribution rather than a fixed one.

There are a number of DIY suites available on the internet that give you customized 401k plans. These plans are by far the most economical ones you will find. Choose a tried and trusted one like http://smallemployer401k.com/ that has good reviews from users. Make sure that product support and pricing is excellent before you make your final decision to buy the 401k suite for your business.