What Happens to My 401(k) Plan When It’s Frozen? (2024)

In a 401(k) "freeze," an employer temporarily halts all new contributions and withdrawals within its 401(k) plan.

You are most likely to experience a 401(k) freeze following a merger, while the new company determines what to do with the 401(k) plan it has inherited.

Key Takeaways

401(k) retirement plans may be “frozen” by a company’s management, temporarily halting new contributions and withdrawals.
A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
During a freeze, the investments in your 401(k) account will continue to gain or lose value with the market.
You may have the option of rolling over the money in your frozen 401(k) into an eligible IRA.

What a Frozen 401(k) Means for You

If your 401(k) has been frozen by your company’s management, you will still retain all of the rights you had prior to the freeze. Your existing investments will still grow or shrink based on their market performance, and your retirement savings will maintain their tax-advantaged status. The only difference is that you cannot add new funds or make withdrawals from your account.

In most cases, you can change the composition of your existing retirement portfolio and shift assets from one investment to another. You should also continue to receive statements in accordance with ERISA guidelines.

What May Happento Your Frozen 401(k)

There is no legal restriction on the length of a retirement plan freeze.Your 401(k) plan may be frozen indefinitely until the new employer decides what to do with it. The new management has three primary options:

1. Merge It Into Another Plan

The new employer may choose to merge your old plan with its own 401(k) plan. In this scenario, your retirement assets are rolled into that 401(k) plan, after which your account is unfrozen. Because 401(k) plans are highly complex and often very different, this can take a long time to execute properly.

2. Terminate the Plan

The new company cannot terminate your plan until it receives a letter from the Internal Revenue Service (IRS) indicating that everything has been properly handled. After termination, your contributions, vested matches, and profits are all returned to you.

If your new employer’s 401(k) plan allows for rollovers, you can opt to have your retirement funds rolled into that plan. Note that if you are under age 59 ½, you must complete your rollover within 60 days in order to avoid a strict tax penalty.

3. Continue the Plan

In this case, existing employees from the acquired company may continue to access the legacy plan, while any new employees will most likely be directed into the new company’s 401(k) plan.

Rollover to an IRA

You can also opt to move your funds into a rollover individual retirement account (IRA) instead of accepting any of the above three scenarios. If you use your old 401(k) money to establish a rollover IRA, you'll keep the tax-advantaged status of those funds and not be hit with an early withdrawal penalty. To protect against tax penalties, be sure to arrange for a direct (trustee-to-trustee) transfer of your funds.

Frozen 401(k) plans are still required to pay out required minimum distributions (RMDs) at your request after you reach the age of 73.

How Long Can a 401(k) Be Frozen?

Legally, there are no restrictions on how long a company can keep a 401(k) plan frozen. Normally, however, management wishes to rectify the situation as soon as possible. In the event that your 401(k) plan is frozen indefinitely, you do have the option to roll it into an IRA and manage it on your own.

How Are Required Minimum Distributions (RMDs) Are Handled During a 401(k) Freeze?

If you have reached the age for required minimum distributions (RMDs) from your 401(k) account and your plan is frozen, the plan custodian should still pay out RMDs as you direct. If this does not happen, request your RMD in writing and document your efforts to avoid IRS penalties.

Can a 401(k) Be Frozen During a Bankruptcy?

No. 401(k) plan funds are generally protected from bankruptcy. That means that if your company goes out of business, your retirement plan money is protected from both your employer and its creditors. If your plan has unvested employer contributions, these may disappear, however. Also, if your plan holds company stock, these shares may become worthless.

The Bottom Line

Under certain circ*mstances, an employer can freeze your 401(k) retirement plan, preventing you from making contributions or withdrawals. However, the money is still yours, and will continue to gain or lose value depending on changes to the market. The frozen plan may eventually be shifted to a new 401(k) provider, or you may be able to roll the funds over to a new plan.

Let's break down the concepts in the article about frozen 401(k) plans and provide additional insights:

401(k) Freeze:
- Occurs when an employer temporarily stops new contributions and withdrawals in a 401(k) plan, often due to corporate restructuring like mergers or changes in plan providers.
Effects of a Freeze:
- Investments in the 401(k) continue to fluctuate in value based on market performance.
- No new contributions or withdrawals are allowed, but existing investments maintain their tax-advantaged status.
- Typically, investors receive statements according to ERISA guidelines.
Options During a Freeze:
- Investors can usually change the composition of their existing retirement portfolios by shifting assets between investments within the frozen plan.
Potential Actions by New Management:
- New employers following a merger might:
  - Merge the old plan with their 401(k) plan, requiring complex execution due to plan differences.
  - Terminate the old plan after IRS confirmation, enabling rollovers or returning contributions, matches, and profits.
  - Continue both plans, directing new employees to the new company's 401(k) plan while allowing existing employees access to the legacy plan.
Rollover to an IRA:
- Investors can opt to move their funds into a rollover individual retirement account (IRA) instead of accepting the employer's actions, maintaining the tax-advantaged status of the funds.
Duration of Freeze:
- Legally, there are no restrictions on how long a company can freeze a 401(k) plan, but companies typically aim to resolve freezes promptly.
- If indefinitely frozen, investors can opt to roll the funds into an IRA for personal management.
Required Minimum Distributions (RMDs):
- Even during a freeze, RMDs need to be paid upon reaching the age requirement. If the plan custodian doesn’t comply, investors should request RMDs in writing to avoid IRS penalties.
401(k) During Bankruptcy:
- Generally, 401(k) funds are protected from bankruptcy, safeguarding the money from the employer and its creditors. However, unvested employer contributions might be at risk, and company stock in the plan could lose value.

In essence, a frozen 401(k) retains its value and tax-advantaged status but restricts new contributions and withdrawals. Individuals affected have options such as waiting for the employer’s decision, rolling over into an IRA, or seeking guidance for potential actions during a freeze or corporate changes.