What Happens to Your Benefits When Your Employer Goes Bankrupt?

As an employee earning benefits you expect that after you reach the retirement age you will receive these monies and use them to live comfortably in your sunset years. That is how it should be, but what happens to your benefits when your employer goes bankrupt?

What should be your plan of action related to securing your benefits?

The Employee Retirement Income Security Act (ERISA) is administered by the Employee Benefits Security Administration (EBSA), which is a component of the Department of Labor. ERISA administers retirement plans – including the 401(k) and profit sharing plans as well as life insurance, health and disability plans. Also under ERISA are the Health Insurance Portability and Accountability Act (HIPAA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA).

These different laws and groups are important to understand when discussing the issue of your benefits when your employer goes bankrupt.

Forms of Bankruptcy and How They Can Affect Your Benefits

An employer’s declaration of bankruptcy may take one of two forms – reorganization or liquidation. Reorganization is covered under Chapter 11 of the Bankruptcy Code, while liquidation is covered under Chapter 7.

The reorganization form usually implies that a business is allowed to continue its operations under the Court’s protection in a bid to normalize its financial affairs.

The liquidation form of bankruptcy is where a company is required to sell off its assets so they can pay their creditors. In effect, the business no longer exists.

Under reorganization bankruptcy, your health or pension plans may or may not be affected but in liquidation bankruptcy, it is most likely that these plans will be terminated.

Steps of Action After Your Employer Files For Bankruptcy

If this happens, you should immediately get in touch with each of your plans administrators or with your union representative if applicable. In your communication, you should request for a description of the current status of your benefits and plans.

Questions To Ask

The following are some of the questions you should get answers to when talking with plan administrators:

• Whether the plan will continue or be terminated

• Who the plan administrator will be during and after the bankruptcy

• Who the trustee in charge of the pension plan will be

• How the accrued benefits will be paid in the event that the pension plan is terminated

• Whether or not COBRA continuation coverage will be offered to employees whose jobs have been terminated

• In the event of the termination of your health plan – how will outstanding claims be settled, and how certificates of credible coverage will be issued

Get the Details Right

It is imperative for you to know the manner in which your health benefits and pension assets will be handled upon termination of your plans. Below is a list of documents that contain crucial information about health and pension plans which should be very useful. These documents can be obtained from your union representative, employer or plan administrator:

• Summary plan description – This describes your health plan and pension plan

• Summary annual report – This is a summary of the financial aspects of the plans and is likely to contain important names and addresses (the report is not offered for some plans)

• Earnings and leave statements – These are your payment details and can be of use in clarifying dates of employment, contributions and compensations with regards to a plan

• Certificate of credible coverage – This is a statement of past healthcare coverage with an employer. It is available upon request.

• Individual benefits statements detailing the amount of money present in your retirement account or the worth of your pension benefit

Retirement Plans

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In situations of bankruptcy, there are two important matters that affect employees.

• Access to one’s pension benefits

• Safety of one’s pension assets moving forward

In most cases one’s pension assets are not at risk upon the declaration of bankruptcy. This is because ERISA requires that pension benefits promised to workers are adequately financed and that these funds are kept separate from a business’ assets. They should be placed in an insurance contract or held in trust. In the event of bankruptcy declaration by an employer, these funds should be safe from any creditors.

Additionally, plan fiduciaries must abide by the ERISA provisions that forbid any abuse or mismanagement of plan assets. If plan contributions are not included in your pay you should confirm that the deducted amounts have been forwarded to the insurance contract or trust.

Benefits Insured by the Federal Government

The Pensions Benefit Guaranty Corporation (PBGC) safeguards traditional benefit plans. This is a corporation under the Federal Government. If the pension plan is terminated due to an employer’s financial difficulty and inability to fund the play and issue the promised benefits, the PBGC becomes responsible for the pension plan. The PBGC pays out the benefits after termination up to a specified maximum guaranteed amount. However, the PBGC doesn’t insure defined contribution plans like the 401(k).

Important Points to Remember If Your Pension Plan is Terminated

• The plan owes you the entire sum of pension benefits earned so far, including that which you would have lost had you left employment voluntarily

• ERISA doesn’t require pension benefits to be issued before the normal age of retirement i.e. 65. If your plan provides for an earlier distribution be sure to go through your summary plan description to establish what rules govern these payments.

• It is important to note that there are important tax consequences that come with pension benefits distribution before retirement age is attained

• Prior to accepting distribution you should consult a tax advisor

Health Plans

Your group health plan must provide notification within 60 days if there will be any reduction in benefits. When the bankruptcy is a reorganizing bankruptcy, it is possible that only some of the plans are affected by the reorganization. In this case, the employee may be eligible for continued coverage in one of the remaining plans.

If you are covered under an employer’s health plan and you lose your job (or substantial hours) due to the bankruptcy, you may be eligible for continued coverage under COBRA. COBRA gives you the right to pay to continue your coverage under the employer’s plan.

If all of the health plans are discontinued by the employer, COBRA will also cease to be available and you will be required to find alternative coverage. This can be done by changing your employer’s group health coverage into an individual policy.

For those receiving health benefits as retirees or where benefits are governed by a collective bargaining agreement there are special bankruptcy rules that can be enforced.

Finally, for unpaid health claims in the event of a bankruptcy, you can consider approaching the bankruptcy court and filing a proof of claim.

Contacting EBSA

You may need to contact the nearest EBSA Regional Office if:

• You can’t access information or documentation with respect to your benefits, pension or health plan

• You suspect that deducted contributions haven’t been deposited into your plan, your pension benefits are not protected, or assets haven’t been sensibly invested

• You need information and help with securing a certificate of credible coverage or with health claims that have not been paid

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