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My Former Employer Sent me a Check for my 401(k) Balance, Now What?

Sep 2nd, 2020 • Damian Dunn

I left a job recently and I had just started participating in the 401(k) there. My employer sent me a check for what I had in my 401(k) account. Can they do that?! What do I do now?

Robert


Hey Robert,

Based on what you’ve shared and what I’m assuming the situation is, yeah, they absolutely can do that. Let me explain.

When you leave a job you’ve got a few options on what to do with your 401(k) account. In no particular order they are:

  • Leave the money in the 401(k) plan
  • Roll the money over to an IRA
  • Roll the money over to a new 401(k) (if allowed by the new plan)
  • Take a distribution

Each of those options could possibly be reasonable, but they all have something in common. You decide what you’re doing with the money. In this particular example, you didn’t sign up for it or maybe even know it was happening. Your old employer was the decision maker and now you’re left wondering what happened. 

This situation is predicated on one thing, Robert. Your account balance. If your account balance falls within (or under) a certain amount, the employer has options available to them. For example, if your account balance is under $1,000, they can cut you a check for the balance of the account. If this is the case (and I suspect it is), you’ve got 60 days to get that money into an IRA or it will be considered a taxable distribution. If you’re not over age 59 ½, you’ll also be looking at a penalty. Yikes. Don’t let that happen. 

If your account balance falls between $1,000 and $5,000, your old employer has the option to close your 401(k) and move the money to an IRA with a provider of their choice. Each employer will have different limits to trigger this involuntary cash out to an IRA, but it can be found in the Summary Plan Description (SPD) of the 401(k). I should also note that the employer doesn’t have to move the money out of the plan at all if that’s what they choose. However, roughly half of 401(k) plans today give employers the option to do so if they want. 

Why would an employer do this? Cost and liability. Every 401(k) account they have in their plan costs them money and exposes them to some amount of liability. For some companies, they’d rather limit their costs and liability in nearly every case, but especially when it comes to former employees. 

So that’s it, Robert. Depending on your age, it may be a great idea to get that money into an IRA to save you another surprise come tax time next year. If anyone else reading this has had an old 401(k) put into an IRA by a former employer, you’re not required to leave the money there, either. You’re well within your rights to open an IRA at a company of your choosing and move the money from one IRA to the other. 

I’m sorry this caught you off guard, Robert. It may not be what you expected, but it was perfectly legal. And the silver lining is you now you know the options on what to do with your money.

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