Old employer forcing out of 401k-rollover options?

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misgnomer
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Old employer forcing out of 401k-rollover options?

Post by misgnomer » Sun Sep 22, 2019 4:26 pm

My wife recently changed jobs a few months ago and is now working as an independent contractor. Prior to this she had been working as an employee and has a employer sponsored 401k plan through Vanguard with a lot of good fund options which has roughly $125K in it. At the time she left her last job, she was given some paperwork from her employer which said they ask that she rollover her 401k to another plan 6 months after her last date of employment. She had contributed the max 19,000 for the time she was working there in 2019 in order to get the maximum match benefits.

Now she is working as an independent contractor, however the plan is likely that she will only be doing that for a year (mid 2019-mid 2020) and then likely will go back to an employed position (however not with the same previous employer).

It may be possible for her to ask her previous employer to let her prolong keeping her 401k with them until mid 2020 when she will likely have another job as an employee with an employer sponsored 401k plan. However, her work the next year may be the only time in her career she works as an independent contractor. I understand if we did a solo 401k we could contribute more, up to 55,000 for 2019, however we are not planning to contribute any more than the 19,000 we've put in.

Additionally, we both contribute to Roth IRAs via a backdoor Roth conversion.

My questions are:

1. Can her previous employer legally force her out of the old 401k? Is it possible for her to just continue to keep her funds there against their wishes?

2. If she is to transfer/rollover her 401k what would be her best account option? It looks like a SEP-IRA is out because of backdoor Roth and our accountant had mentioned before that a solo 401k could be a big hassle to manage but would that be the best option? Would it be a hassle for us or mainly just the accountant?

3. Would anyone recommend opening a solo 401k now regardless because she has to ability to do it being classified as an independent contractor and may not be able to do it in the future as an employee? I am considering this so there are other fund options if her future employer 401k does not offer good fund choices.

4. If she did open a solo 401k now and in the future had an employer 401k with bad options, what are the rules for rollover from the employer 401k to the solo 401k? Could she contribute to the employer 401k, get the employer match, and then immediately rollover the funds to the solo 401k?

Appreciate any input!

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Brianmcg321
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Re: Old employer forcing out of 401k-rollover options?

Post by Brianmcg321 » Sun Sep 22, 2019 4:36 pm

Just roll it over to a Vanguard IRA.
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JAZZISCOOL
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Re: Old employer forcing out of 401k-rollover options?

Post by JAZZISCOOL » Sun Sep 22, 2019 4:42 pm

My questions are:

1. Can her previous employer legally force her out of the old 401k? Is it possible for her to just continue to keep her funds there against their wishes?


She should ask the employer for the Summary Plan Description (SPD) of the 401(k). In this document it should state whether she must move her assets out of the plan or not. Many employers will allow you to keep the assets in the plan but some may not based on the plan document. Some may force you out if the $$ amount is small or for other reasons to relieve the administrative burden of the company.

Big Dog
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Re: Old employer forcing out of 401k-rollover options?

Post by Big Dog » Sun Sep 22, 2019 4:43 pm

1. No. Yes. But unless the admin/management fees are low, might as well...

2. Vanguard Roll-over IRA.

sergio
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Re: Old employer forcing out of 401k-rollover options?

Post by sergio » Sun Sep 22, 2019 4:49 pm

This is only somewhat related but I would try to keep the money in the 401k unless you are in a state that has solid IRA protection against creditors/lawsuits/bankruptcy etc.

I work at a small company and we still have people in our 401k plan that retired/left years ago since the plan has a great selection of funds. There is some minor administrative burden (we need to send out a few notices a year) and I think we pay $50/year per person.

The only people we want out are those that got involuntarily terminated or left on bad terms.

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misgnomer
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Re: Old employer forcing out of 401k-rollover options?

Post by misgnomer » Sun Sep 22, 2019 4:52 pm

Thank you for the advice so far.

What type of Vanguard IRA is suggested? We can't do a traditional IRA or a SEP-IRA because of backdoor Roth conversions.

cherijoh
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Re: Old employer forcing out of 401k-rollover options?

Post by cherijoh » Sun Sep 22, 2019 5:12 pm

misgnomer wrote:
Sun Sep 22, 2019 4:26 pm
1. Can her previous employer legally force her out of the old 401k? Is it possible for her to just continue to keep her funds there against their wishes?
My recollection was that the former employer could only force closure for a low balance in the plan. This webpage on the IRS.gov appears to support this.
If you’re leaving your job and you have a retirement plan (other than a defined benefit (pension) plan), you generally have four options for your account balance:

1. Leave your money in the plan
You may want to keep the balance in your old plan, especially if:

you like the plan’s investment options,
the plan has low fees, or
you want to move the balance to a new employer’s plan later.
If your account balance is less than $5,000, your employer may require you to move it. In this case, consider rolling it over to your new employer’s plan or to an IRA.

Lafder
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Re: Old employer forcing out of 401k-rollover options?

Post by Lafder » Sun Sep 22, 2019 5:21 pm

Solo401k at Fidelity is super easy to manage and no extra management fees. Vanguard does not let you roll outside retirement accounts into a solo401k, Fidelity does.

If the account balance is over 250k you need to file an extra form once a year for a solo401k, and not for a SEP IRA.

Either a SEP IRA or Solo401k can be opened during the year of self employment, then maintained even if you are no longer self employed.

A SEP IRA is an IRA and will effect her ability to ever do a back door Roth, as will a Rollover IRA.

A solo401k allows a greater total tax deductible contribution than a SEP IRA, for the same income. A solo401k allows the catch up provision if over 50.

Why are you so sure she will not contribute more this year? Even if her employee contribution is maxed, she can still make the employer contribution.

Overall there is no reason I would prefer a SEP, and multiple reasons to prefer a solo401k.

Even if you roll the 401k into a Rollover IRA, you can still decide to open a solo401k as long as it is open by 12/31 of the tax year, and roll the rollover IRA to the solo401k later.

My accountant also discouraged a solo401k and said "it's more paperwork and not much difference in what you can put away." But I pushed and did it based on what I read here. And she said "You were right, the solo401k did allow you to put a lot more away." And since I do all of the paperwork.... I can tell you that it is not much more work. The hardest part and extra work for me is that my SEP at Vanguard allowed electronic fund transfers and with my solo401k at Fidelity I have to mail a check and form. But, not a big deal.

I believe former employers can force you to move your holdings..........and if no, there is no reason to keep there unless they have unusually low expense ratios.

lafder

HomeStretch
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Re: Old employer forcing out of 401k-rollover options?

Post by HomeStretch » Sun Sep 22, 2019 5:37 pm

If your spouse does not want to open a Solo 401k and must rollover her pretax balance in the former employer’s 401k, then she has three choices:
1. Take a distribution of the entire 401k balance, pay taxes and penalty.
2. Rollover to a Roth IRA and pay taxes.
3. Rollover to a traditional rollover IRA.

#3 is the most likely option. That means she could not do a backdoor Roth without being subject to the pro rata rule. If she thinks she will return to a W-2 job in 2020, then go ahead and make the 2019 non-deductible tIRA contribution (in a separate IRA account from the rollover IRA account) but hold off converting to a Roth IRA until she has a 401k Plan in 2020 that will accept the rollover in from the rollover IRA and she completes the rollover. She will have some earnings in the IRA account holding the non-deductible contribution that she can also rollover to the Roth IRA and pay minimal taxes. This way she doesn’t lose the 2019 IRA contribution space.
Last edited by HomeStretch on Sun Sep 22, 2019 8:37 pm, edited 1 time in total.

lakpr
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Re: Old employer forcing out of 401k-rollover options?

Post by lakpr » Sun Sep 22, 2019 8:30 pm

misgnomer wrote:
Sun Sep 22, 2019 4:52 pm
Thank you for the advice so far.

What type of Vanguard IRA is suggested? We can't do a traditional IRA or a SEP-IRA because of backdoor Roth conversions.
See cherijoh’s comment above. Ask the employer to provide the Summary and Detail Plan documents. Then read carefully.

If there is no mention of having to move the 401k plan funds at end of employment anywhere in the documents, push back. Strongly. Warn the employer that you will complain to the IRS and do so. You said your wife already maxed out the contribution for the year, so she exceeds the $5k minimum balance that IRS requires. She should be in the clear.

If the plan documents do mention that it is mandatory (not just suggested or optional) to move the funds out at the termination of employment, I am afraid you are out of luck.

As mentioned in previous responses, open a Solo 401k for your wife’s business if it is the latter case. Slightly more paperwork, but worth doing to preserve the ability to do backdoor Roth. Do it at Fidelity or eTrade.

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Stinky
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Re: Old employer forcing out of 401k-rollover options?

Post by Stinky » Mon Sep 23, 2019 8:02 am

lakpr wrote:
Sun Sep 22, 2019 8:30 pm
misgnomer wrote:
Sun Sep 22, 2019 4:52 pm
Thank you for the advice so far.

What type of Vanguard IRA is suggested? We can't do a traditional IRA or a SEP-IRA because of backdoor Roth conversions.
See cherijoh’s comment above. Ask the employer to provide the Summary and Detail Plan documents. Then read carefully.

If there is no mention of having to move the 401k plan funds at end of employment anywhere in the documents, push back. Strongly. Warn the employer that you will complain to the IRS and do so. You said your wife already maxed out the contribution for the year, so she exceeds the $5k minimum balance that IRS requires. She should be in the clear.
An article on Investopedia mentions a limited exception to the $5k rule; that is, if the balance related to contributions while employed at the employer (rather than roll-ins from other plans) is less than $5k. See link below.

https://www.investopedia.com/retirement ... ur-rights/

That being said, having a situation like this with a former employer would make me very angry. The employers policy would appear to be a clear violation of the law, unless there is some other mitigating circumstance that hasn’t been brought up yet.
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Faith20879
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Re: Old employer forcing out of 401k-rollover options?

Post by Faith20879 » Mon Sep 23, 2019 8:49 am

misgnomer wrote:
Sun Sep 22, 2019 4:26 pm

1. Can her previous employer legally force her out of the old 401k? Is it possible for her to just continue to keep her funds there against their wishes?
My employer(800 employee) 's 401K plan document stated that employee severed from service must remove the balance from the plan (rollover to an IRA, take distribution or whatever) within 18 months time. I think it is fair. I don't work there anymore and they are not obligated to pay for my 401K adm. fees. With 18 months, I can batch it in the way most beneficial to my tax situation.

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Re: Old employer forcing out of 401k-rollover options?

Post by Jack FFR1846 » Mon Sep 23, 2019 9:36 am

Faith20879 wrote:
Mon Sep 23, 2019 8:49 am
misgnomer wrote:
Sun Sep 22, 2019 4:26 pm

1. Can her previous employer legally force her out of the old 401k? Is it possible for her to just continue to keep her funds there against their wishes?
My employer(800 employee) 's 401K plan document stated that employee severed from service must remove the balance from the plan (rollover to an IRA, take distribution or whatever) within 18 months time. I think it is fair. I don't work there anymore and they are not obligated to pay for my 401K adm. fees. With 18 months, I can batch it in the way most beneficial to my tax situation.
It may be fair for the employer to require you to get out so as to not pay your fees, but that doesn't mean that legally they can require you to get out.
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Stinky
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Re: Old employer forcing out of 401k-rollover options?

Post by Stinky » Mon Sep 23, 2019 9:55 am

Faith20879 wrote:
Mon Sep 23, 2019 8:49 am
misgnomer wrote:
Sun Sep 22, 2019 4:26 pm

1. Can her previous employer legally force her out of the old 401k? Is it possible for her to just continue to keep her funds there against their wishes?
My employer(800 employee) 's 401K plan document stated that employee severed from service must remove the balance from the plan (rollover to an IRA, take distribution or whatever) within 18 months time. I think it is fair. I don't work there anymore and they are not obligated to pay for my 401K adm. fees. With 18 months, I can batch it in the way most beneficial to my tax situation.
My former employer charged an administration fee to active participants, and a higher admin fee to participants in the Plan who were no longer employed or retired.

That seems fair to me. Much more fair (and probably legal) than forcing inactive participants out of the Plan.
It's a GREAT day to be alive - Travis Tritt

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Re: Old employer forcing out of 401k-rollover options?

Post by Spirit Rider » Mon Sep 23, 2019 11:16 am

misgnomer wrote:
Sun Sep 22, 2019 4:26 pm
1. Can her previous employer legally force her out of the old 401k? Is it possible for her to just continue to keep her funds there against their wishes?
Unless her previous employer is terminating the plan. They can ask but under IRS regulations, they can not force out any separated participants who have >= $5K in assets due to employee + employer contributions.
2. If she is to transfer/rollover her 401k what would be her best account option? It looks like a SEP-IRA is out because of backdoor Roth and our accountant had mentioned before that a solo 401k could be a big hassle to manage but would that be the best option? Would it be a hassle for us or mainly just the accountant?
Your accountant is ill informed. Yes, a one-participant 401k plan does require completing and submitting an adoption agreement, but that is quite trivial and the plan providers are more than helpful in completing. There is no requirement for annual business activity or contributions. There is no annual reporting on Form 5500-EZ until the plan balance on 12/31 of any year is > $250K. Even that is relatively easy to complete.

A one-participant 401k plan is your best option for a self-employed employer retirement plan. I certainly would adopt one now. I would try to contribute some amount of the maximum 20% of self-employed earned income (business profit - 1/2 SE tax). Lost tax-advantaged contribution space has a lost opportunity cost. Also, you will have established the one-participant 401k plan for future rollovers if necessary. E-Trade, Fidelity, Schwab and TD Ameritrade accept rollovers and have no annual fees. Vanguard has a $20/fund annual fee for non-Voyager clients and does not accept rollovers.

If the current 401k plan has good investment choices with low cost expense ratios. She might consider leaving the assets in the previous 401k plan. It will have full federal ERISA anti-alienation asset protection. A one-participant 401k is a non-ERISA plan and subject to the creditor protection of your state.
3. Would anyone recommend opening a solo 401k now regardless because she has to ability to do it being classified as an independent contractor and may not be able to do it in the future as an employee? I am considering this so there are other fund options if her future employer 401k does not offer good fund choices.
While I recommend that she adopts a one-participant 401k now, it is not necessary. Under 401(c) a self-employed individual with self-employed income in the current or any prior year is eligible to adopt a 401k plan
4. If she did open a solo 401k now and in the future had an employer 401k with bad options, what are the rules for rollover from the employer 401k to the solo 401k? Could she contribute to the employer 401k, get the employer match, and then immediately rollover the funds to the solo 401k.
IRS regulations prohibit the in-service withdrawal/rollover of employee elective contributions (pre-tax deferrals and designated Roth contributions) prior to age 59 1/2. IRS regulations allow but do not require the in-service withdrawal/rollover of vested employer contributions prior to age 59 1/2. However, most 401k plans have restrictions on the in-service withdrawal/rollover of vested employer contributions.

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