If you previously took a distribution or rolled over your 401(k) funds, you may be surprised to learn that you have a new balance in your Guideline account. This is likely the result of your previous employer’s plan incurring what’s known as a partial plan termination.
A partial plan termination occurs when there has been a significant reduction in the number of employees covered by the plan, typically resulting from layoffs, bankruptcy, insolvency, change in ownership, or substitution of another type of retirement plan.
When a partial plan termination occurs, the IRS requires all employer contributions of participants who terminated employment in the applicable year to become 100% vested. As a result, the balance you see in your Guideline account would be the amount of a previously forfeited non-vested balance.
Because the funds you receive from a partial plan termination are vested employer contributions, the balance will not impact your annual deferral limit.
How to withdraw vested funds after a partial plan termination
If you have a balance in your Guideline account due to a partial plan termination, you can request a distribution or rollover at any time as long as you are still not employed by the employer sponsoring the plan.
Please find step-by-step directions on how to complete the distribution request here.
Note that if you take a cash distribution of the funds from a partial plan termination, the amount will be included as taxable income. Additionally, unless you qualify for an exemption, you may owe a 10% early withdrawal penalty tax on the full amount when you file your taxes.
However, you can avoid taxes and penalties by rolling over the funds to an eligible retirement plan or IRA.