Guidant Financial Group Blog

The Labor Department reported today that unemployment has reached a 4-year high and that the average hourly work week has dropped 0.1 hour to 33.6 hours (see Unemployment at 4-year High).

A large number of Guidant’s 401(k) small business financing clients came to us after being laid off. Because many laid-off workers are experienced employees, they tend to have a large amount of funds put away in their 401(k)s.

For those of you who are facing a layoff and pondering the idea of starting your own business should the unfortunate take place, here is an important tip for you:

If you have a company 401(k), you can use the money in that account to help start your business – without taking a distribution! BUT, in order to take advantage of 401(k) small business financing, your funds will need to be rollable (meaning, they can be transferred out of your 401(k) into another tax-deferred account).

Although laid-off, you may still be considered an employee of the company for some time. If your employer considers your layoff as potentially temporary, or if you choose a severance package that keeps you on the payroll for a period of time, they will most likely continue to hold the assets of your 401(k) in their account.

One problem: almost all 401(k) plans do not allow for the rollover of funds if an account holder is still employed with the plan sponsor. Bottom line? You cannot use Guidant’s 401(k) small business financing solution if you are continuing a payroll relationship with your employer.

So what should you do?

When you have that disappointing meeting with your HR rep or your boss, be sure to ask what the status of your 401(k) plan will be once the layoff takes effect. If it appears that your 401(k) will stay on the company books, find out if, by taking any severance as a lump-sum in lieu of continuing a payroll relationship, you will be able to transfer your 401(k) balance out of the company plan.

Although rare, there are some companies that allow the rollover of 401(k) funds before termination of employment, so it is important to ask what options you have with your 401(k) plan as soon as you are faced with a layoff.

Starting your own business can be a great way to escape the cycle of layoffs that tend to face many Americans. 401(k) small business financing can help to give you a significant head start – if the money is rollable.