Rule of 55. Entire 401k plan is being terminated due to acquistion
Hello,
An employee aged 56 his company is being acquired. His plan was to invoke Rule of 55 if loses his job due to layoffs at new employer or simply wants to not stay at new employer. He is being told the 401k at old employer will cease to exist in six months. Employees told to take IRA rollovers or transfer assets into the new employer 401k. Everything I have read says that Rule of 55 will not apply to funds transferred into a 401k. I can see how this would apply to prior employer plans prior to 55 age. But what about rolling in funds from a plan where the employee was 55? If the new 401k rolled over assets will not be “grandfathered” for Rule of 55 then is the employee’s plans to access his nest egg completely blown up because the old plan is terminating in 6 months?
Thank you
Permalink Submitted by Alan - IRA critic on Fri, 2025-09-19 11:05
If employee rolls the old plan balance into the new plan or out to an IRA, the age 55 penalty exception does not apply because there is no taxable distribution. If employee actually separates from service and then takes a taxable distribution from the sponsoring plan the penalty exception will apply.
If the old plan balance is rolled to the new plan AND the employee becomes an employee of the new employer and then separates from the new employer, the penalty exception will apply. Therefore, the exception depends on which plan the taxable distribution is taken from and whether the employee has separated from service from the employer that sponsored the plan.
One combination the employee should avoid is rolling the old balance into the new plan, but never becoming an employee of that new plan sponsor because a separation of service cannot apply if employee was never employed by the new employer.
Permalink Submitted by Andrew B on Fri, 2025-09-19 12:21
Since the old plan will be left open only 6 months the employee will not be taking taxable distributions from the old plan. The employee will (at least temporarily) definitely be an employee of the new company (new 401k, new health benefits etc). So the employee will roll the old plan into the new plan, be an employee, and then when he separates from the new company all the “legacy” assets that were rolled in will be able to take distributions (age 57, 58, 59) with no penalty. Thats what i am assuming from Alan “If the old plan balance is rolled to the new plan AND the employee becomes an employee of the new employer and then separates from the new employer, the penalty exception will apply.” So this is great news then.. the nest egg at the former employer can still be accessed when separation from the new employer after the old plan is rolled into the new plan. Thank you!
Permalink Submitted by Alan - IRA critic on Fri, 2025-09-19 12:49
Yes, your summary is correct.