Can former employers withhold money from your 401(k) when you’re laid off?
There are two main ways to move money from your workplace retirement plan when you leave your job. One can cost you.
When a worker leaves their job, either by choice or due to layoffs, they typically have to decide what to do with the money they've accumulated in their employer-sponsored 401(k) plan. The two main options are to roll over the funds into an Individual Retirement Account (IRA) or into a new employer's 401(k) plan, if allowed.
The issue arises when former employers choose to withhold a portion of the 401(k) funds, often to cover administrative costs or to recoup loans the employee had taken from the plan. This can be costly for the departing employee, who may face penalties and taxes on the withheld amount if it's not rolled over correctly. Industry experts note that while employers are generally allowed to deduct certain costs from 401(k) distributions, the practice of withholding funds can be complex and may not always be clearly communicated to departing employees.
To watch next: The Department of Labor has been scrutinizing 401(k) plan administration and fee disclosures. Investors should review their plan documents and understand their options when leaving a job. If you're laid off or departing your employer, take care to review your 401(k) distribution carefully and consider consulting a financial advisor to ensure a smooth rollover and avoid unnecessary penalties or taxes.
Originally reported by marketwatch.com. BondNews adds analysis for finance & markets readers.