What happens if your employer goes bankrupt? (Retirement Plans).
The answer in part will depend on what type of bankruptcy the company files. Under Chapter 11, which is more common, it stays open and reorganizes financially. In such cases, many employees will continue to work and the retirement plan probably will continue, though the employer may reduce or eliminate matching contributions it was making before, or perhaps modify the plan's proviso. Filing Chapter 7 is far more serious. Here, the firm shuts down and any company-sponsored retirement plans are terminated.
Fortunately for employees, for the most part, their retirement rights and assets are protected under the Employee Retirement Income Security Act. ERISA, which applies only to private employers, requires that any retirement plan assets, whether under a traditional pension one or a defined-contribution plan such as a 401(k), be held in trust, separate from corporate assets and thus secure from company creditors. However, that doesn't always mean you won't lose some retirement funds.
Traditional pension plans, under which an employer agrees to pay out a defined benefit upon retirement, are Federally insured. Thus, if your employer goes belly up and the pension plan is underfunded, the Federal Pension Benefit Guaranty Corporation will step in to pay benefits. The catch is, it pays only up to a maximum limit. In 2002, that limit for workers retiring at age 65 is approximately $3,580 a month, or $42,955 a year. Although most employees will get full benefits under these maximums, higher-paid employees or workers with generous union-negotiated plans may not receive all that was promised.
The Federal government does not insure defined-contribution plans such as 401(k)s. ERISA requires plan assets to be held in trust and thus protected from creditor claims, but that still leaves room for losses. For example, your account's assets are not protected against decline in investment value, as employees of World Com, Enron, Kmart, and other firms holding large amounts of company stock in their plans painfully learned.
You also may lose some retirement benefits in the event that your plan contributions and any employer matching contributions are not deposited before the company files for bankruptcy. In the case of employee contributions, this usually amounts to no more than one paychecks worth because employers are supposed to deposit employees' contributions promptly, but could involve several months' worth of matching employer contributions because employers are not required actually to put in their money until their tax-filing deadline.
In the midst of the turmoil of a bankruptcy, there is one upside for plan participants---all automatically become 100% vested. For example, a plan might require that you work there three years before you can take control of the employer's match of your plan contributions (you always own your own contributions). If bankruptcy occurs, though, you own the match immediately, even if you had not worked there a full three years.
Another area of potential loss of retirement benefits involves non-qualified retirement pans, in which employers promise to defer compensation and pay it upon retirement. There are tax advantages to this strategy, but risks as well. Those assets are not protected from creditors, and a bankrupt company probably won't have the funds to pay, anyway. For instance, Kmart quit paying several retired executives money under its supplemental executive retirement plan.
You can take steps to protect yourself at least partially against these potential losses. Try to determine if the company is depositing your contributions to its defined-contribution plan as required by law. If it isn't, it may be a sign of a company in trouble. Contact the nearest office of the Pension Welfare Benefits Administration at once. Keep records of contributions and account statements. Contact the plan administrator right away if your company files for bankruptcy. Review all pertinent plan documents, such as the summary plan description. Moreover, before deciding to participate in a nonqualified plan, assess the future financial health of your employer. If you are concerned, some nonqualified plans will protect the promised assets from creditors, though you may lose the tax advantages.
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|Publication:||USA Today (Magazine)|
|Date:||Dec 1, 2002|
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