You are most likely to experience a 401(k) freeze following a merger where the new company must determine what to do with the 401(k) plan it has acquired. During this process, the employer temporarily halts all your new plan contributions and withdrawals, hence the term “frozen.”
What a frozen 401(k) means for you
If your 401(k) has been frozen by your company’s new management, you still retain all of the rights you had prior to the freeze. Your investments still grow or shrink based on their market performance, and your retirement savings maintain their tax-advantaged status. The only difference is that you cannot add new funds or make withdrawals from your account.
In most cases, you can change the composition of your existing retirement portfolio and shift assets from one investment to another. You also continue to receive statements in accordance with ERISA guidelines.
What happens to your frozen 401(k)
There is no legal restriction on the length of a retirement plan freeze; your 401(k) plan may be frozen indefinitely until the new employer decides what to do with it. Your new management has three primary options with recently acquired 401(k) plans:
1. Your 401(k) plan may be merged with the other company’s existing 401(k) plan. In this scenario, your retirement assets are rolled into the new plan, after which the 401(k) is unfrozen. Since 401(k) plans are often very different and highly complex, this can take a long time to execute properly. You can also opt to move your funds into a rollover IRA instead of having them rolled into the new plan.
2. Your 401(k) plan may be terminated (“discontinued”). This cannot be completed until the company receives a letter from the IRS indicating that everything has been properly handled. After termination, your contributions, vested matches and profits are all returned. Assuming the other 401(k) plan allows for rollovers, you can opt to have your retirement funds rolled into that plan. Whether or not rollovers are allowed, however, you can move your funds into a rollover IRA.
3. The 401(k) plan may be left alone (“continued”), at which point your account is unfrozen. Here, it is likely that any new employees at your company are directed into the new company’s 401(k) plan.
If you choose to use your old 401(k) money to establish a rollover IRA, you keep the tax-advantage status for those funds and are not charged an early withdrawal penalty.
Required minimum distributions with a frozen 401(k)
If you have reached the age for required minimum distributions (RMD) from your 401(k) account and your plan is frozen, your plan sponsor still pays out RMD. If this does not happen, request your RMD and document your efforts to avoid IRS penalties.