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How does filing for Chapter 7 affect your employees’ 401(k)?

On Behalf of | Dec 6, 2023 | Chapter 7 |

As a business owner considering Chapter 7 bankruptcy, you might feel concerned about your employees’ future — particularly their 401(k) plans. Bankruptcy does have implications for these defined contribution plans. But fortunately, government protections exist for your employees’ benefits.

The security of their 401(k)

When your company files for Chapter 7 bankruptcy and closes, your employees’ concerns may naturally gravitate toward their 401(k) accounts. However, the Employee Retirement Income Security Act of 1974 (ERISA) provides significant protections. ERISA ensures that retirement funds, including 401(k)s, are separate from the company’s assets. This separation shields them from creditors’ reach. So, employees’ 401(k) savings remain secure even during bankruptcy.

Vested amount and potential impacts

Despite these protections, certain factors might affect the final amount of your employees’ 401(k) balances. One is the vesting schedule — determining when employees earn rights to employer contributions. While employees’ own 401(k) contributions are always theirs, your matching contributions may be subject to a vesting schedule. This means that if your company closes before these contributions are fully vested, employees might not receive all of them.

Transitioning 401(k) assets after a shutdown

Your employees can manage their 401(k) assets even if your company closes. They can roll over the money to their new employer’s plan, take a distribution or put their savings into an individual retirement account (IRA). However, it’s important to note that early withdrawal penalties might apply.

Further changes to their account

Chapter 7 bankruptcy and company closure will inevitably bring changes to your employees and their 401(k) savings. Despite this, their savings remain largely protected thanks to federal regulations. However, there could be impacts on the total savings in their accounts and changes in due dates for 401(k) loans.

After filing for Chapter 7, it’s crucial to communicate openly with your employees. Informing your employees about the implications of this filing, their protections and their options for account rollover can help ease their concerns during this challenging time.