What happens to a terminated employee’s 401(k) account?
When an employee is terminated, their 401(k) account remains active and vested based on the plan’s rules. They can no longer make contributions, but their investments will continue to fluctuate with the market. Former employees can choose to keep the account where it is, roll it over to another retirement account, or take a distribution (which may be subject to taxes and penalties).
Do I need to notify Betterment when an employee is terminated?
You should update the employee’s status by either marking them as terminated in the Betterment dashboard or in your connected payroll system. This properly classifies terminated employees in our system and stops further contributions.
Learn how to update an employee’s status.
Is there a deadline for updating a termination?
Terminations should be processed as soon as possible after the employee’s final payroll has been submitted. Timely updates allow former employees to have access to their funds without delay.
Will the terminated employee still have access to their account?
Yes. Former employees will continue to have access to their Betterment account and can log in at any time to manage their investments, update personal information, or make rollover or distribution requests.
Will Betterment notify employees that they have been marked as terminated?
No. Betterment does not send any communications to former employees notifying them of a change to their employment status.
Can we remove a terminated employee’s account from the plan?
The account will remain in the plan until the participant chooses to move it or until they meet any force-out criteria, if applicable under your plan.
Will Betterment notify employees that they have been marked as terminated?
No. Betterment does not send any communications to inform employees that their employment status has been marked as terminated.
How do terminated employees access their 401(k) funds?
After termination, employees have several options for their 401(k) account:
- Leave the account in the plan — Their investments will continue to fluctuate with the market, and they will retain full access to manage their account.
- Roll over the account to a Betterment IRA — They can open a Betterment IRA and transfer their balance directly.
- Roll over the account to another retirement account — They can move their funds to another retirement account.
- Request a cash distribution — They can withdraw their funds, which may be subject to taxes and early withdrawal penalties.
Distribution requests are processed electronically unless the employee has an outstanding loan. If there is an outstanding loan, additional steps may be required before funds can be distributed.
When a terminated employee requests a distribution, the request will appear in the plan sponsor dashboard for review. Plan sponsors are responsible for approving or rejecting pending distribution requests.
How do I review and approve a terminated employee’s distribution request?
When a terminated employee requests a distribution, the request will appear in the Plan Sponsor Dashboard for review. Plan Sponsors must approve or reject pending distribution requests. During the review, please verify the employee’s vesting information and employment status for accuracy.
If any information is incorrect, contact Betterment at Work before approving the distribution so we can make the necessary updates.
Learn more about approving distribution requests.
Important:
Plan Sponsors are responsible for reviewing and approving certain actions related to terminated employees, including employment status updates and pending distribution requests.
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