How Long Can a 401k Be Frozen?

When two or more companies merge, they may freeze the 401(k) as the new management decides what to do with the plan. When this happens, employees cannot withdraw or add funds to the account. However, they retain all rights that existed before the retirement plan was frozen.

A 401(k) plan can remain frozen for an indefinite time until the new management decides the next course of action. Typically, there are no legal requirements that the new employer must decide what to do with the 401(k) within a specific timeframe. The new management can decide to continue the plan, merge the two companies’ plans, or terminate the acquired company’s plan.  

What does a frozen 401(k) mean?

If your 401(k) has been frozen for the management, it means you cannot make further contributions or make withdrawals from the 401(k). You will retain rights to your retirement money that is held in the 401(k), and the investments will continue growing based on how the market performs. The plan administrator must continue sending periodic statements according to the ERISA guidelines. In most cases, you may be allowed to rollover the 401(k) to an IRA during the freeze.

How long does a 401(k) freeze last?

There are no legal requirements on how long a 401(k) can remain frozen. Once the employer freezes the 401(k) plan, the freeze can remain indefinitely until it decides what to do with the retirement plan. When the 401(k) is frozen, the plan administrator continues managing the plan, but there is nothing much you can do before the employer lifts the freeze.

Employer’s Options with a Frozen 401(k)

Generally, the employer has several options with the frozen 401(k) plan:

Merge the two 401(k) plans

When two companies merge, the new management can decide to merge the 401(k) plans of the two companies. In this case, the 401(k) assets of the acquired company are rolled over into the combined entity’s plan. Usually, merging the two 401(k) plans is a complex process, and it can take anywhere from a few weeks to several months. The plans remain frozen until the merger process is complete.

Continue the old 401(k) plan

Merging two 401(k) plans with different mutual fund choices and other varying features is a complicated process, and the new management may decide to retain the acquired company’s 401(k) plans. Existing employees of the acquired company will continue making contributions to the old 401(k) plan, while new employers will be moved to the new company’s 401(k) plan.

Terminate the 401(k) plan

The new management can also decide to terminate the acquired company’s 401(k) plan. However, the management must receive a letter from the IRS confirming that all processes have been handled properly. Once the plan is terminated, the 401(k) plan must return all employees' contributions, vested matches, and any investment earnings.

If the new employer allows rollovers to its 401(k) plan, employees of the acquired company can rollover the 401(k) funds to the new employer’s 401(k) plan. Alternatively, employees can rollover the 401(k) into an IRA to get greater control over their retirement savings.

Your Options With a Frozen 401(k)

If your employer’s company is acquired by another company, the 401(k) plan may be frozen until the new management makes a decision on the fate of the existing 401(k) plan. When your 401(k) is frozen, it means that you cannot access your 401(k) money until the new management decides what to do with the plan. You cannot withdraw money, take a 401(k) loan, or even contribute money to the plan.

If you want access to the frozen 401(k) money or you don’t accept the new management’s outcomes, you can opt to rollover the 401(k) funds into an IRA. You can transfer the 401(k) funds to a rollover IRA, and still maintain the tax-advantaged status of the funds and avoid an early withdrawal penalty. You can avoid incurring taxes and penalties by arranging for a direct trustee-to-trustee transfer of your funds.

Required Minimum Distributions When 401(k) is Frozen

The IRS requires that retirement savers must start taking required minimum distributions (RMDs) from their 401(k) by April 1 of the following year after they reach age 72. If you reach the RMD age and your 401(k) is still frozen, the 401(k) plan must still make RMD payouts on time. If the plan administrator does not make the RMD payments, you must request payment of the minimum distributions in writing, and document your efforts. The communication trail can help you prove that you made an effort to get the RMD to avoid IRS penalties.