07 Sep What will happen to my 401(k) after company shuts down?

Q. My close relative is on unemployment because her employer sold the company. She turned 72 in February of this year and had a 401(k) with the employer. What will happen to her fully vested 401(k)? Will she be required to take a distribution and will it affect her unemployment benefits?
— Trying to help

A. Several things could happen.

First, what happens to the 401(k)?

It will depend in part on how the sale of the company was structured, said Marnie Hards, a certified financial planner with Aznar Financial Advisors in Morris Plains.

She said if the company is merged into a new company, it is likely that the 401(k) plan will be merged into the new company’s 401(k) plan.

It is also possible that both company plans will be maintained separately. The third option is that the 401(k) plan will be terminated, she said.

If your relative is happy with the investment options and associated expenses in the new 401(k) plan, if there is one, she can leave the 401(k) plan in place, Hards said. If she is not happy with the plan, she can initiate a rollover to an IRA.

“She would need to set up an IRA account with a custodian such as Vanguard, Schwab or TDAmeritrade,” Hards said. “Once the account is established, she would need to submit transfer paperwork to the new custodian and a copy of her most recent 401(k) plan statement. The new custodian will then take care of transferring the funds directly from the 401(k) to the new IRA.”

This transfer, also known as a trustee-to-trustee transfer, will avoid any negative tax implications, Hards said.

It’s important to note that if the balance in the 401(k) plan is less than $5,000, the plan may automatically place the funds into an IRA in her name, she said.

Now, the Required Minimum Distributions, or RMDs.

She is required to start taking RMDs by April 1st of the year following the year that she turned 72, Hards said.

“There are a variety of online calculators to help with calculating the amount that must be distributed each year,” she said. “The RMD is calculated by dividing the prior Dec. 31 balance of the retirement plan by a life expectancy factor that the IRS publishes in Publication 590-B that applies to her situation.”

On unemployment, in order to continue to receive, your relative must be able to work, actively seeking work, available for work and not refuse an offer of suitable work, she said.

The rollover of the company retirement plan will not impact her ability to claim unemployment benefits, she said. However, if she starts receiving a lifetime pension or 401(k) benefits, she may be considered ineligible for unemployment because she would be considered retired at that point, Hards said.

“New Jersey reduces unemployment benefits by half of your 401(k) withdrawals. But if she is withdrawing from an IRA that she was the sole contributor of, the unemployment benefits should not be impacted,” Hards said. “As long as she moves the employer sponsored retirement plan to an IRA before she starts taking distributions, she should not be subject to an unemployment insurance reduction.”

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This story was originally published Sept. 7, 2021.

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