Why Would Your 401(k) Be Unavailable After You Leave a Job?

Once your employment with a company ends, you have several options for what to do with your 401(k) plan. You can cash it out (and pay income tax on the amount), roll it over to another company’s 401(k) if you have a new job, roll it over to a traditional IRA, or keep it in the previous employer’s 401(k). The most common procedure when terminating employment is to roll over the funds from the previous employer’s 401(k) to a new employer’s 401(k) or to an IRA.

But what happens if your employer denies you access to your 401(k) funds once your employment is terminated?

In principle, it's completely illegal for a company to restrict access to your own 401(k) funds. “If you are restricted from accessing your vested 401(k) funds, that is indeed illegal," noted Stephen Rischall, a financial advisor with 1080 Financial Group in Los Angeles. "At all times you have full rights to withdraw all of your contributions made to the plan in addition to fully vested employer matching contributions if applicable.”

Mark Hebner, founder and president of Index Fund Advisors in Irvine, Calif., further explained: “Your 401(k) is made up of two items: contributions made by you, which are legally yours and you should have access to at all times. Then there are (possibly) matching contributions made by your employer. If your 401(k) is a safe harbor plan, then you have legal ownership of those contributions as well and should have access at all times. If there was a vesting schedule associated with matching contributions, then you may only have partial ownership of those contributions.”

But there are several possible reasons why there may be restricted access to the funds in a 401(k) plan. One of them is that the contributions to your 401(k) were entirely made by your company and you did not put any of your own money into it. As Jeremy Portnoff, a financial advisor with Portnoff Financial in Woodbridge, N.J., points out, this could result in a loss of the fund, since it is wholly comprised of funds contributed by the former employer: “[There is] a possibility that if the funds were all employer contributions and are not vested, then you basically forfeit the funds.”

However, as Portnoff further notes, “If it is a plain old regular 401(k) to which you made contributions and are thus vested in those contributions, upon termination of employment you should be able to access those funds, change investments, rollover to an IRA, etc." So an important first step is to determine the plan’s vesting schedule, and understand what proportion of the contributions (if any) are fully vested.

Another reason that your employer may be denying you access to your 401(k) is that there is a litigation process in place related to the plan, during which assets may be temporarily frozen, as Portnoff suggested. Similarly, according to Rischall, short-term restricted access to your funds may happen “in the event the plan sponsor is changing record keepers or there is a blackout period in which funds cannot be changed or accessed in any way. This is legal and notices must be provided to active participants at least 30 days prior to the blackout start date.”

Finally, recently terminated employees may be subject to different rules regarding their access to their plan. If this is the case, “You should call the provider and ask them specifically why you do not have access to your money. There may be certain rules in place for recently terminated employees, [like] an outstanding loan, etc.,” Hebner advised.

Whatever the reason may be—and whether it is legitimate or not—you should always thoroughly check with your employer or former employer concerning the facts of your specific case. If, for instance, you need to wait for a short period of time to be able to access your funds due to external circumstances, you should have that clarified—and, if possible, have the terms put in writing. If no external circumstances are present and your previous employer still denies you access without proper explanation, you should address your case to the Department of Labor.