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.
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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.
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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.
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Because the funds you receive from a partial plan termination are vested employer contributions, the balance will not impact your annual deferral limit.
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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.
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Please find step-by-step directions on how to complete the distribution request here.
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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.
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However, you can avoid taxes and penalties by rolling over the funds to an eligible retirement plan or IRA.