What is "IRS compliance testing" for terminated 401k plans?

Question

I have a 401k through a previous employer. That employer recently ceased operations, and as part of that, terminated their 401k plan. As such, the employer directed myself and other employees to fill out distribution forms so that we could roll the money into other accounts (I am trying to roll it into an IRA account).

I filed the distribution form a couple months ago. After a month of waiting for the money to get to my IRA, I called the 401k plan provider and asked what was going on. They said the check must have been lost, so they claimed they cancelled it and sent a new one.

It's now been another month, and the money is still not in the IRA. I called the 401k provider again and now they say that the money is being held up by their 3rd party provider because due to the plan terminating, the money is subjected to "IRA compliance testing." They said they don't know how long that might take, but it could be up to a year. They said during that time the account is liquidated and the money is sitting in a cash account somewhere. I've spoken with other former employees from the company and they've gotten similar information.

What is the "IRA compliance testing" that they are speaking of? How long might it take? What rights (if any) do I have?

I'm very concerned that the market could improve while the money is in limbo, effectively costing me money. Even without market movement, I'm losing interest and/or dividends by not having the money properly invested.

Update: My understanding is that the 401k provider needs to submit IRS Form 5310 before they can distribute the money, and that the "compliance testing" essentially means "paperwork to get the Form 5310 complete." Is that accurate?

Answer 1

Yes, its all about the paperwork.

But realize that Form 5310 is filled out by the plan sponsor who is your now gone employer. Your 401k provider is only following instructions of whomever is control of the remains.

Do remember that in the US the 401k as a retirement plan was accidental construct of the tax code. Legally the now defunct company is only on the hook for the retirement balance on the date of termination (ergo the cash account you've mentioned).

From: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-plan-terminations

Why is the IRS holding the money from my retirement plan now that the plan has terminated?

The IRS does not maintain or hold the assets during the plan termination process. When a plan has formally terminated and the plan sponsor has submitted a Form 5310, Application for Determination for Terminating Plan, the IRS will review the application. Many times, we ask for additional information before we issue a favorable letter, and the review process may last for several months. The employer or trustee is not required to hold the assets until we issue a favorable determination letter but usually will do so to ensure that plan distributions will receive the favorable tax treatment given to distributions from qualified plans.

So now you are dealing with the legal and accounting team which is winding down your old employer (one of many presumably) and the responsiveness of the IRS. As you have no negotiable liabilities (old company vendors/suppliers/other creditors) I'm not even sure if the legal team will waste time on you. The money is there, the legal team is waiting for the 'favorable determination letter'.

While I agree about the lost opportunity cost, should there be a market crash before the funds are released, you are still getting the amount owed on the date of termination.

As for actions to take, I would find out who is winding down your old company and call your 401k plan provider every few months/monthly to make sure they still hold the account. If no distribution has occurred in a year, referencing the IRS guidance to all related parties may help.