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How Does Employer Bankruptcy Affect Pensions?

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What Happens to Your Pension If Your Employer Goes Bankrupt?

Since many companies go bankrupt, your hard-earned pension may not be as secure as you think. Bankruptcy may affect your pension as well as other employee benefits such as a health insurance. To understand the extent to which your pension and other benefits will be affected, you must know what type of bankruptcy the company is going through.

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.

EIRSA Protections for Pension Benefits

Fortunately, the Employment Retirement Income Security Act (EIRSA) should protect an employee's retirement fund. The EIRSA 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 Guarantee 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)

Seeking Legal Advice

If your pension had been jeopardized by your company’s bankruptcy, you may need a qualified pension and benefits 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.

Photo of page author Pavel Leshchinskiy

, LegalMatch Legal Content Developer

Last Modified: 08-24-2016 10:23 PM PDT

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