Termination of employment is just one life event that can affect a 401k retirement plan. Retirement plans vary on the distribution options available to the terminated employee. The company plan document will state these options, and the employer should provide a summary plan document that will include information on the timing of termination distributions. The company plan administrator should make these options available shortly after separation, if not before.
Early Termination Options
401k plans offer various options to employees after termination of employment, including a requirement to keep the funds in the plan until some future date, rolling funds over to an individual retirement account, or distribution of the funds in cash. If the retirement plan balance is over $5,000 the plan may allow employees to keep the money invested in the plan. If the employee has less than $5,000, plans may allow the funds to either be rolled over to an IRA, or distributed directly to the employee. If the terminated employee is married, his or her spouse's consent may also be required before rollover or direct distribution.
Release of Funds by the Employer
Plans may vary on the release of funds in an employee retirement account from a few weeks to in some cases more than a year. If the employee elects or is required to take a distribution from the retirement plan the timing of the release of account proceeds often depends on how the funds are invested. If the company 401k plan has cash, money market or mutual fund investments, the release to the former employee may be immediate. If the employer invests in private company stock, or similar investments that are less liquid, often the release is delayed until the investment can be converted to cash. In some cases this may take more than a year to complete.
Terminated may rollover the vested balance of their 401k retirement account to another qualified retirement plan, or to an individual retirement account. In the case where a terminated employee finds a new job, the employee can transfer the funds if the new plan allows for rollover contributions. The employee may also choose to rollover funds to an individual retirement account. Banks, insurance companies and investment firms all offer rollover IRA products.
Since qualified 401k retirement plan contributions are made pretax, if the terminated employee elects to take a cash distribution the proceeds may be subject to regular income tax. The distribution may also be subject to a 10 percent penalty for early distribution unless the individual meets certain criteria. One of those criteria is that the terminated employee be age 55, or in the case of certain public safety employees, age 50.