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Retirement Topics - Termination of Employment

When should participants expect to receive distributions from their retirement plans after terminating employment (laid off, quit or fired)?

Generally, the law requires plans to pay retirement benefits when the participant retires at an age specified in the plan. However, many plans allow participants to receive payment of benefits after terminating employment. The plan's summary plan description should state the plan’s rules for obtaining a distribution as well as the timing of distributions after termination of employment, which may include:

  1. Continue to keep the assets in the plan until some future date or until those benefits must be paid under the terms of the plan;

  2. Take a distribution of all or part of his or her vested retirement plan benefits from the plan. However, the participant would likely have to include any previously untaxed portion of the distribution in his or her gross income and may have to pay an early withdrawal tax on that amount.

  3. Roll over all or part of the amount of the participant’s account balance into an IRA or a qualified plan maintained by a new employer that allows receipt of rollovers.

The form of a distribution (lump sum, annuity, etc.) and the date retirement money will be available to a participant depends upon the terms of the plan document. Some plans do not permit distribution until the participant reaches a specified age or has been separated from employment for a certain period of time. In addition, some plans process distributions throughout the year and others only process them once a year. Participants should contact their plan administrator regarding the rules that govern distributions.

In many plans, if a former employee’s vested account balance does not exceed $5,000, but is more than $1,000, the plan must roll over the amount directly into an IRA, unless the former employee elects to receive a distribution of the balance or to have the balance directly transferred to another plan or IRA. If the former employee is married, his or her spouse’s consent may also be required.

Generally, a 401(k), profit-sharing or other type of defined contribution plan, may provide for a lump sum distribution of retirement money when a participant leaves the company. However, a defined benefit plan will provide that benefits begin at retirement age. These types of plans are less likely to contain a provision that enables participants to withdraw money early.

A terminated participant should review the terms of his or her former employer’s plan and the terms of any new employer’s plan, to determine all available options.

Additional resources:

Publication 4128, Tax Impact of Job Loss
Publication 4763, Job Related Questions During an Economic Downturn
Topic 558 - Tax on Early Distributions from Retirement Plans
Publication 560, Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
Publication 590,
Individual Retirement Arrangements (IRAs)
Retirement And Health Care Coverage...Q&As For Dislocated Workers - Publication from DOL
Health And Retirement Benefits After Job Loss - DOL web page
A Rollover Chart summarizing the rollover rules is provided as a general guide but should not be relied upon as a substitute for professional tax advice.

Page Last Reviewed or Updated: 14-Jul-2014