If you previously took a distribution or rolled over your 401(k) funds, you may be surprised to see a new balance in your Gusto Retirement account. This is likely the result of your former employer’s plan going through a partial plan termination. This article explains what that means, why you have the balance, and how to access those funds.
A partial plan termination happens when there is a significant reduction in the number of employees covered by the plan. Common causes include:
Layoffs
Bankruptcy or insolvency
Change in ownership
Substitution of another type of retirement plan
When a partial plan termination occurs, the Internal Revenue Service (IRS) requires all employer contributions for participants who left the company during the applicable year to become 100% vested.
The balance in your Gusto Retirement account is the amount of a previously forfeited non-vested balance. Because these funds are now vested employer contributions, they do not count toward your annual deferral limit.
If you have a balance due to a partial plan termination, you can request a distribution or rollover at any time — as long as you are no longer employed by the employer sponsoring the plan.
For step-by-step directions, see how to complete a distribution request.
If you take a cash distribution of the funds from a partial plan termination, the amount counts as taxable income. Unless you qualify for an exemption, you may also owe a 10% early withdrawal penalty tax on the full amount when you file your taxes.
Pro tip: You can avoid taxes and penalties by rolling over the funds to an eligible retirement plan or IRA.