Switching & Exits
What Happens to Your 401(k) When You Leave a PEO
TL;DR
- •In a PEO master 401(k), the PEO is the plan sponsor — not you.
- •Leaving the PEO usually triggers a "plan termination" event for your participants requiring distribution or rollover.
- •A successor plan can preserve participant balances and avoid early-distribution friction.
Most PEOs offer a master 401(k) plan that you join as an "adopting employer." When you leave the PEO, you are removed from the master plan. Your participants' balances do not automatically follow you.
Three paths forward
- 1. Successor plan — you establish a new 401(k) with a recordkeeper before the PEO exit, and balances roll over via plan-to-plan transfer
- 2. Distribution event — participants take taxable distributions or roll over to IRAs (most disruptive)
- 3. Continuation under PEO — some PEOs allow brief continuation post-exit; rare and usually expensive
The three common mistakes
- Not establishing the successor plan before the PEO exit date
- Missing the safe-harbor notice deadlines for the new plan year
- Failing to communicate vesting treatment clearly — vesting in the PEO master plan does not automatically carry over
This is one workstream where having an ERISA attorney or an experienced recordkeeper involved early pays for itself. The cost of getting it wrong is measured in participant complaints and DOL exposure.
Frequently asked questions
Do participants lose their match?
Vested balances follow the participant. Unvested balances may be forfeited depending on the master plan document.
Can we keep the PEO's recordkeeper after we leave?
Sometimes. Many PEO recordkeepers also serve standalone plans. Ask early.
Related reading
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