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Your Employer's Bankruptcy: How Will It Affect Your Employee Benefits?

The Department of Labor, Employee Benefits Security Administration (PWBA), administers the Employee Retirement Income Security Act of 1974 (ERISA), which governs pension plans (including profit sharing and 401k plans) and welfare plans (including health, disability, and life insurance plans). ERISA also includes the health coverage continuation and accessibility provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Insurance Portability and Accountability Act (HIPAA). This information sheet focuses on bankruptcy's effect on pension plans.

If an employer declares bankruptcy, it will generally take one of two forms: reorganization under Chapter 11 of the Bankruptcy Code, or liquidation under Chapter 7. A Chapter 11 (reorganization) usually means that the company continues in business under the court's protection while attempting to reorganize its financial affairs. A Chapter 11 bankruptcy may or may not affect your pension or health plan. In most cases, plans continue to exist throughout the reorganization process. In a Chapter 7 bankruptcy, the company liquidates its assets to pay its creditors and ceases to exist. Therefore, it is likely your pension and health plans will be terminated.

When your employer files for bankruptcy, you should contact the administrator of each plan or your union representative (if you are represented by a union) to request an explanation of the status of your plan or benefits. The summary plan description will tell how to get in touch with the plan administrator. Questions that you may want to ask include:

Will the plan continue or will it be terminated?

Who will be acting as plan administrator of the plans during and after the bankruptcy, and who will be the trustee in charge of the pension plan?

If the pension plan is to be terminated, how will accrued benefits be paid?

Know Your Plan

Know the plan rules that govern the way your pension assets and health benefits are treated when the plan is terminated. The following documents contain valuable information about your health and pension plans and should be helpful to you. You should be able to obtain most of them from your plan administrator, employer, or union representative.

  • Summary Plan Description - A description of your pension and health plan.
  • Summary Annual Report (not available for some plans) - An annual summary of the plan's finances that may contain names and addresses you may need to know.
  • Earnings and leave statements - These are your pay stubs and may help you establish your employment dates, compensation, and contributions to a plan.
  • Individual benefit statements showing how much money is in your pension account (for individual account plans) or the value of your pension benefit (for defined benefit plans).

Retirement Savings Plans

Workers in bankruptcy situations face two important issues when it comes to their retirement benefits: access to retirement benefits and the continued safety of their retirement plan assets. Generally, your retirement plan assets are protected when a business declares bankruptcy because ERISA requires that retirement plan monies be kept separate from an employer's business assets and held in trust. Thus, if an employer declares bankruptcy, the retirement funds should be secure from the company's creditors. In addition, plan fiduciaries must comply with the ERISA provisions, which prohibit the mismanagement and abuse of plan assets. If contributions to a plan have been withheld from your pay, you may want to confirm that the amounts deducted have been forwarded to the plan's trust.

If you are in a 401k plan, ESOP, or other plan where the contributions, rather than the benefits, are promised, the value of the investments held in your account will determine your retirement benefits. For example, if your plan account holds investments in your employer's stock, your account balance - and retirement benefit - will likely decrease as a result of your employer's bankruptcy.

If you are in a traditional (defined benefit) pension plan, with promised benefits, some of your benefits may be insured by the Pension Benefit Guaranty Corporation (PBGC), a Federal Government corporation. If a defined benefit plan is terminated because an employer has financial difficulty and cannot fund the plan, and the plan does not have enough money to pay the promised benefits, the PBGC will assume responsibility for the plan. The PBGC pays benefits after termination up to a certain maximum guaranteed amount. On the other hand, defined contribution plans, such as 401k plans, are not insured by the PBGC.

In the event the pension plan is terminated, the plan must vest your accrued benefit entirely. This means that the plan owes you all the pension benefits that you have earned so far, including benefits you would have lost if you had voluntarily left your employment. If your pension plan is ongoing, ERISA does not require that pension benefits be paid out before normal retirement age, usually age 65. Your plan may provide for distribution sooner than this. Some plans require participants to reach a certain age before benefits will be distributed, and some require the participant to have been separated from employment for a specified period of time. You should review the summary plan description for the plan rules regarding payment of benefits. Also remember that taking a distribution of pension benefits before retirement may have important tax consequences. You may need to consult with a tax advisor before accepting the distribution.

Where to Go for Help

You should contact the PWBA Toll-Free Employee & Employer Hotline number at 1.866.275.7922 or email us at www.askpwba.dol.gov if:

  • You are unable to obtain information or documents about your benefits or related to your pension or health plan;
  • You suspect contributions deducted from your paycheck have not been deposited to the plan, your pension benefits are not safe, or the assets are not prudently invested;

For more information on employee retirement, go to www.dol.gov/ebsa/ or call 1.866.275.7922 for a list of publications.

This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210.

Additional Resource

Participants in a Bankrupt Company's Retirement Plan Can Expect to Wait for Their Money

Abstract: When a business files for Chapter 7 bankruptcy, a panel trustee is appointed to oversee the bankruptcy and is required to assume fiduciary responsibility for administering any retirement plan by eventually terminating it and distributing the funds to participants. How long this will take and the amount of money participants receive depends in large part on how well the plan was administered prior to the filing.

Source: Millennium Trust

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