What Should You do When Your Employer Terminates 401K Benefits?

The Coronavirus pandemic severely affected small and large businesses across the United States. While Covid-19 might be ending, supply, labor, and other economic issues are still impacting businesses today. 

Recent events have caused an economic downturn; employers are cutting expenses and slashing benefits, including freezing or terminating 401(k) plans. Employees already experiencing pay cuts may find it difficult to plan their finances for the future if their 401(k) retirement benefits are lost.

401(k) matching contributions have been suspended due to the COVID-19 crisis. Other companies are freezing 401(k) plans or terminating them altogether.

The Plan Sponsor Council of America reported that 1.3% of responding organizations were ending their retirement plans. Among organizations with fewer than 200 participants, 3.6% said they would cancel their retirement plans. Some reports suggest that many more companies risk canceling their 401(k) plans, despite the low number of companies whose 401(k) plans have already been terminated. About 200,000 small businesses are at risk of losing their retirement plans, according to the American Society of Pension Professionals and Actuaries. Plan Sponsor Council of America executive director Will Hansen compared COVID-19 to a punch to the economy that causes businesses to close suddenly.

Employers are trying to recover from the covid19 lockdowns and shelter in place. They are doing everything they can to reduce expenses and stay in business in light of shelter-in-place orders and the resulting economic shock. Benefits are often cut as a result.

Terminating a 401(k) plan may be easier for some employers than simply suspending matching contributions. That’s because complex tax rules regulate 401(k) plans and require that all employees are treated fairly, according to Hansen. 

It is easy for a company to demonstrate that they treated all employees equally by terminating the plan completely., and this would allow them to avoid penalties that are costly.

Retirement Savings Without a 401(k)

Employees’ retirement plans suffer when companies terminate their 401(k) plans. Although the Coronavirus crisis disrupted Americans’ retirement savings, they were already behind. The Economic Policy Institute reported in late 2019 that nearly half of families had no retirement savings, including those approaching retirement. The following steps can help protect your retirement if your employer terminates your 401(k).

Open Up an IRA or Roth IRA

Don’t give up on retirement savings if your employer terminates your 401(k). Investing in an individual retirement account (IRA) or Roth IRA with your choice of an investment company may be a good option.

• Traditional IRA: 

A traditional IRA allows you to contribute $6,000 per year, or $7,000 if you are over 50. Withdrawals are taxed as ordinary income, and contributions are tax-deductible now. Traditional IRAs can be opened by anyone, regardless of their income level.

• Roth IRA: 

Contribution limits for Roth IRAs are the same as for traditional IRAs. Roth IRAs, on the other hand, are contributions made after tax. Taking qualified distributions in retirement is tax-free, and Roth IRAs have income limits.

Rollover Your 401(k) Plan to an IRA.


According to Drew Feutz, a Certified Financial Planner with Market Street Wealth Management Advisors, withdrawing money from your 401(k) is not a good idea. 

Your traditional 401(k) plan can continue to grow tax-deferred if you roll it into a traditional IRA. Cashing it out could be costly in terms of taxes and penalties., and state and federal income taxes apply to 401(k) account distributions. Unless you meet certain exceptions, you could be subject to a 10% early withdrawal penalty if you haven’t reached retirement age.

Unless necessary, don’t withdraw retirement funds.

Never use retirement funds to pay near-term expenses unless you have no other option. You could lose years of potential growth by withdrawing money now.

Nevertheless, there are provisions to help you withdraw money from your account if you’ve been laid off or are facing financial hardship.

Looking Ahead

It can be frustrating to hear that your employer is ending its 401(k) plan, but it’s important to understand that your employer is doing this to continue operating.

Take steps now to prepare for what may happen in the future in such difficult financial situations.

According to Feutz, these times emphasize the importance of having a properly funded emergency fund. You can begin saving money towards your emergency fund if you don’t have one already by checking your spending and cutting back where possible. You can start saving money for your emergency fund by examining your spending and identifying where you can reduce your spending for a while.