Employee 401k Funds Ques. - Company "Going Under"

[Guest nroth]

I've had an employee ask me a question concerning what would happen to their funds if our company were to "go under." I'm not entirely sure as the reasoning behind the question and am fairly new to 401k but without looking at the plan documents yet, which I will do, I thought I'd shoot you the question too. It is my understanding that the employee's funds are guaranteed but the employer's match is where I'm not certain. If the employee is already 100% vested in the funds, would there be any reason, some type of law that states they would not be entitled to those funds?

They mentioned the possibility of transferring out the funds from their current account, stopping all deductions and restarting their deductions in October. I don't believe this is possible but since I'm not an expert...I'm thinking other than a loan, hardship withdrawal or a termination, an employee can't just withdraw/transfer the funds as they want.

Any help is appreciated!!!

[Steve72]

If an employee is vested, there should be no issue getting the full balance from his or her account upon a distributable event, regardless of the source of the contributions.

You are correct, a participant cannot simply "withdraw" his or her account from the 401(k) without a distributable event (such as termination). Loans and hardships, as you mentioned, are methods by which the participant can access the money, but they are subject to rules which should be given in the plan.

[MJ Hartman]

the issue of a company "going under" came up in a meeting last week. A participant has a rollover balance from a company currently in bankruptcy court. She has received 75% of her balance but has been told that since the co. is in bankrupcty court she has to wait for the remaining 25% until things are settled. This goes against what I understood with qualified plan assets and trust protection. She said that none of her account was in co. stock, just standard mutual funds. Is this situation common or even allowed. this is in ny state.

[MoJo]

My guess, MJ, is that only partial distributions were made because the actual balances aren't known, or may be adjusted as a result of expenses yet due to the recordkeeper/service provider/trustee. Once a final valuation is complete, and plan expenses settled, balances will probably be distributable. Rest assurred that except for legitimate and reasonable plan expenses, the balance will be paid to the particpants.