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What to Do When You Are Involuntarily Removed From a Former Employers 401k Plan

    
Yes, it is legal for your former employer to involuntarily remove you from their 401k plan when you have a balance of $5,000 or less. They do not need your permission. They are required to provide you with notice before doing so, but it doesn't always happen. It is up to you to be prepared. Here is some help.

Click on the link below that applies to your situation:

If you have just recently lost a job or changed jobs and have NOT been notified that you are being removed from 401k plan...

If you have received a notice that you will be removed from a former employers 401k plan...

If you have already received a check from a 401k plan at a former job...


If you have just recently lost a job or changed jobs and have NOT been notified that you are being removed from 401k plan...

1. Check your records to see if your 401k balance is $5,000 or less.

2. Go through your correspondence and determine if your former employer's 401k plan administrator has already notified you that you must take action about your low-balance 401k account.

3. Contact the plan administrator of your former employer and determine if they intend to close out low-balance IRA accounts. If not, you may wish to leave your savings where they are. If they do plan to eliminate low-balance accounts, ask the plan administrator for the details on how to rollover your money into an IRA account, including "direct transfer" or "trustee-to-trustee" information.

4. Contact a financial institution to set up your IRA account.* Share the information about your new account with your former employer's plan administrator. Make sure the money is transferred directly to the new IRA account and not to you. Most financial institutions will provide you with a Direct Rollover form, which should be used to ensure a smooth transfer of assets.

IMPORTANT NOTE: If you receive a check from your former employer made payable to you to be deposited into your new IRA, you'll have to forward it on to the financial institution yourself, along with a Rollover Certification form, which the new IRA custodian will provide. However, you should try to arrange the direct transfer of the funds from the former plan to the new IRA, since you otherwise will be responsible for making up the 20 percent difference in taxes withheld on your behalf in order to avoid having to report the 20 percent as taxable income. Additionally, there is another 10 percent penalty for an early withdrawal on any amount (including the 20 percent withholding) that is not rolled over within 60 days. The check must be deposited into the IRA account within 60 days of receiving it.

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If you have received a notice that you will be removed from a former employers 401k plan...

1. Use the paperwork provided with the notice to determine how to rollover the 401k account savings into a new IRA. If the notification is not accompanied by the necessary paperwork, contact your former employer's plan administrator to get the instructions for making the rollover. Most financial institutions will provide you with a Direct Rollover form, which should be used in conjunction with whatever paperwork your former employer requires to complete the direct rollover to an IRA account.

2. Contact a financial institution to set up your IRA account.* Share the information about your new account with your former employer's plan administrator. Make sure the money is transferred directly to the new IRA account and not to you. Most financial institutions will provide you with a Direct Rollover form, which should be used to ensure a smooth transfer of assets.

IMPORTANT NOTE: If you receive a check from your former employer made payable to you to be deposited into your new IRA, you'll have to forward it on to the financial institution yourself, along with a Rollover Certification form, which the new IRA custodian will provide. However, you should try to arrange the direct transfer of the funds from the former plan to the new IRA, since you otherwise will be responsible for making up the 20 percent difference in taxes withheld on your behalf in order to avoid having to report the 20 percent as taxable income. Additionally, there is another 10 percent penalty for an early withdrawal on any amount (including the 20 percent withholding) that is not rolled over within 60 days. The check must be deposited into the IRA account within 60 days of receiving it.

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If you have already received a check from a 401k plan at a former job...

1. The clock is ticking and you need to take action immediately. Contact a financial institution to set up an IRA account.* Be sure to request a Rollover Certification form along with the new IRA account application to ensure that your check is properly recorded as a rollover contribution. IMPORTANT: You'll need to deposit the check in the new IRA account within 60 days of when you received it.

2. Bite the bullet and scrape up a few extra dollars to deposit at the same time. When the 401k check was cut for you, your former employer's plan administrator deducted 20 percent to pay for taxes. If you want to avoid a further 10 percent penalty for an early withdrawal from your former 401k -- and, yes, unfortunately, the payment of the taxes is considered an "early withdrawal" -- you'll have to replace the 20 percent. If you don't replace the 20 percent paid out in taxes, you will need to pay taxes on the 20 percent PLUS an additional 10 percent penalty for early withdrawal.

IMPORTANT ADVICE: Resist the temptation to simply spend the check. Remember: You'll have to include this distribution in your taxable income, and face an additional 10 percent tax penalty. If you are young and just staring to save for retirement, the early dollars are the ones that add up the most in the end. Do the smart thing: Open an IRA, deposit the former 401k dollars into it, scrape up the 20 percent withheld for taxes in order to avoid the 10 percent penalty. Think of this as an important first step in the process of committing to save for your retirement.

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* Please note that a rollover IRA is one of several options for maintaining the tax-deferred status of your retirement plan assets. Your new employer may allow you to rollover your 401k assets into the new employer's plan. Rollover rules and investment choices will vary from plan to plan. You should consult with your own financial adviser to determine which investment option is right for you.

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.

 


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