Since many companies go bankrupt, many wonder whether their pension goes under as well. Fortunately, a federal corporation called Pension Benefit Guaranty Corporation insures pension plans. 

However, the downside is that if you were planning on receiving a large pension benefit and the plan wasn’t fully funded when the company went bankrupt, your payments may be reduced down to the maximum guaranteed benefit. The maximum guaranteed benefit from the PBGC is based on the age you start drawing your pension.

What are the Types of Bankruptcies and Pension Plan Obligations?

Chapter 11: If your company is going through Chapter 11 bankruptcy, it is likely to continue operating. In this case, you may not completely lose your benefits. However, an employer may no longer match your payments in a defined contribution plan.

Chapter 7: If the company is filing for Chapter 7 bankruptcy, your pension benefits will be jeopardized more seriously. You may lose your benefits entirely.

What are the ERISA Protections for Pension Benefits?

The Pension Benefit Guaranty Corp. protects defined benefit pensions the same way and the Employment Retirement Income Security Act (ERISA) should protect an employee’s retirement fund. The ERISA offers protection by:

  • Requiring a separation of the plan assets from the employer’s assets
  • Requiring that plan funds are kept in trust or invested in an insurance contract
  • Applying the above protections to defined benefits as well as defined contribution plans

Through these measures, a company’s creditors generally cannot use pension plan funds to satisfying outstanding debts. However, an employee may need to double-check that his contributions are appropriately sent to the plan’s insurance contract or trust.

Are There Any Further Protections in Case of Bankruptcy?

Many regular pension plans (i.e. defined benefit plans) are also backed by the Federal Pension Benefit Guaranty Corporation (PBGC), which will pay up to a certain limit if your employer goes bankrupt and is unable to pay. However, note that the PBGC pays only up to a certain level. The PBGC protections apply to the following defined benefit plan’s benefits:

  • Vested retirement benefits
  • Some survivors benefits
  • Benefits related to early retirement

What are Some Additional Risks?

Even though both ERISA and PBGC provide some protection for the employees’ pensions, there are several things that employees must keep in mind:

  • Creditors’ claims may apply to deferred compensation plans
  • ERISA may not protect other employee benefits, such as health insurance
  • If health plans are cancelled, a terminate employee may not be able to take advantage of Consolidated Omnibus Budget Reconciliation Act (COBRA)

What Should I Ask My Employer?

To maximize your pension benefits, you should get as much information as you can about your employer’s pension and do the following:

  • Ask your employer about your pension plan and whether it is insured by PBGC
  • Learn about PBGC at pbgc.gov and how the maximum monthly benefits may affect you
  • Get a summary description of your pension plan from employer
  • Learn about your company’s financial position and prepare yourself for changes such as bankruptcy

Do I Need an Attorney?

If your pension had been jeopardized by your company’s bankruptcy, you may need a qualified employment lawyer to look into your case. An attorney may be able to protect your pension from creditors and you may also have a case against your company for mismanagement of funds.