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Company Bankruptcy and Your Benefits  |
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There is no doubt that the US economy will eventually rebound. Unfortunately the same may not be true for many US companies that have been struggling to survive the current economic crisis. Bankruptcy is in the future of many US companies. What do you do if one of those companies is yours?
The critical issues here are retirement and healthcare, but they might also extend toward other lesser company benefits. The first question to ask is what kind of bankruptcy has been filed. Under Chapter 11 bankruptcy, companies generally stay open and reorganize financially so they can continue to operate and fight their way back to health. Yet there may be some intermediate changes – the employer may cut or temporarily slash employer matching on 401(k) plans or modify certain elements of traditional defined benefit plans to ease its own cash concerns.
If the company is forced to file bankruptcy under Chapter 7 liquidation, employees and retirees are far more exposed to losing benefits altogether. As the company closes its doors, typically all company-sponsored retirement and health care plans and related benefits are terminated.
If you’re uncertain how such a major change in your employer’s financial future might affect you, a visit to a Certified Financial Planner™ professional might be a wise move. There, you can take a sweeping look at all the changes that have happened to your retirement investments in recent years and get a broader sense of how to plan for retirement going forward.
There are some critical federal protections in the case of either bankruptcy format for private employer retirement plans, but they do have limits. The Employee Retirement Income Security Act (ERISA) requires that any retirement plan assets, whether under a traditional pension (known as a defined benefit plan) or under a 401(k) (known as a defined contribution plan) be separate from corporate assets and thus secure from company creditors.
Traditional pension plans have an added protection – federal insurance. The Federal Pension Benefit Guaranty Corp. (PBGC) will essentially pay up if your employer goes under up to a maximum limit based on the kind of annuity that underlies your plan. Generally, the PBGC backs up most vested normal retirement benefits, early retirement benefits and certain survivors' benefits at the level in effect on the date of a pension plan's termination. However, the PBGC does not guarantee all types of benefits under covered plans. In 2009, the maximum monthly limit paid under PBGC for workers retiring at age 65 is $4,500, which may be fine for most workers. For workers who would receive a higher pension if they retired while the company was healthy, though, the income they had originally hoped for may be potentially lower. In case of bankruptcy – there is one added benefit –all employees in affected plans are automatically 100 percent vested.
The Federal government doesn’t insure 401(k) s, though the ERISA requirements keep the wealth in those plans away from creditors. Obviously, if your company is publicly held and has lost significant stock value, that’s something that can’t be protected.
Employees should be aware of one more risk. Deferred compensation plans are generally not protected from creditors and when bankruptcy comes, it’s unlikely the company will be able to fund those plans.
Regarding healthcare for current workers and retirees, their group health plan must give notification within 60 days of any reduction in benefits. Current workers and retirees under age 65 are the most exposed if retiree health benefits are terminated through bankruptcy court. ERISA law protects pensions, but not retiree health benefits, against corporate bankruptcy.
If your retiree health benefits are terminated, you need to find out what other health coverage is available to you as soon as possible – see whether you have options with a spouse’s plan or through private health insurance. It’s not a bad idea to consult a financial planner or your independent insurance agent just to see what options might be available. Also keep in mind that if an employer cancels all of its health plans and you lose your job, you will not be able to buy continuing coverage through Consolidated Omnibus Budget Reconciliation Act (COBRA).
Retirees 65 or over are in much better shape. They are covered by Medicare and should consider purchasing Medicare supplemental insurance to cover prescriptions and other expenses not covered under Medicare.
Questions to ask now:
How much of my company 401(k) is invested in company stock? Granted, you might already have a sense of how your company’s stock value might be affecting your plan – it’s a reflection of your company’s financial health. But it’s important to know, if you haven’t asked, how much of your retirement assets might be tied up in company shares.
Did my company continue making plan contributions and matching benefits right up to the bankruptcy filing? While this might not add up to much money when you do start receiving retirement benefits, you need to check whether the company was on time with its contributions right up until the bankruptcy filing date. Check with the company’s plan administrator to check this status, and keep the phone number of the nearest office of the Pension and Welfare Benefits Administration to see how the company is doing with ERISA requirements and the Pension Benefits Guarantee Board to ask critical questions about the status of your defined benefit plan.
What are my health insurance options if my company cancels my plan? If you are under age 65 and are still working or retired, you should immediately check your health benefits status with the company and look for other independent insurance options if there is likelihood your coverage might be terminated.
Information for this article provided by the Financial Planning Association (FPA). For more information about FPA, visit www.FPAnet.org or call 800.322.4237.
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