As if Worrying About Your Job Isn’t Enough… How Your Employer’s Bankruptcy Will Affect Employee Benefits
Your employer just filed for bankruptcy? Now what happens? You have been assured that your job is safe, but what will happen to your health and pension benefits? These are all substantial issues that can dramatically change a family’s financial security, and significantly impact plans for retirement. As more and more businesses approach and enter bankruptcy, the answers to these questions become more and more important.
Will Your 401(k) Plan Change?
The answer to this question depends largely on the type of bankruptcy filed. A company will generally file either a Chapter 7, which means the employer is shutting its doors and liquidating its assets, or a Chapter 11, which is a restructuring of its business. In a Chapter 7, it is likely that the 401(k) plan will be terminated, and employees will be required to roll-over their invested funds from that plan into another appropriate vehicle, such as an IRA. In a Chapter 11, a 401(k) plan may not be affected, and may continue unchanged when the company emerges from bankruptcy.
Generally, 401(k) contributions will not be impacted by your employer’s bankruptcy, unless invested in the public stock of your bankrupt employer. In that case, the value of such investments goes as the market takes them.
Monies deposited into a 401(k) plan are not considered property of the bankruptcy estate, and therefore, generally not subject to administration by the bankruptcy court. As a result, neither the estate nor its creditors can look to the assets in a 401(k) plan as a source of repayment. Those funds are considered your property as a plan beneficiary.
The Department of Labor administers the Employee Retirement Income Security Act of 1974 (ERISA), which governs plans including profit sharing and 401(k) plans. ERISA regulations govern the timing of payments due to 401(k) plans, which are generally contemporaneous for employee contributions, and scheduled for employer contributions. Employees should closely review the quarterly statements they are given, to be sure their employer has correctly deposited employee contributions into the 401(k) plan which were deducted from their paycheck.
Unfunded employer obligations may or may not be paid into the plan, depending on the specifics of the bankruptcy. However, if the company discontinues the plan, such as in the case of bankruptcy liquidation, employee rights will be considered fully vested, including for all employer contributions.
What is the Impact on Your Health Insurance Benefits?
ERISA regulations govern employer welfare plans including health, disability and life insurance plans. ERISA also includes the accessibility provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA).
Your group health plan must notify you within 60 days of any reduction of benefits. If a reorganizing employer maintained more than one plan, you may be eligible to continue coverage in its remaining plan, even if your plan is discontinued.
If you are covered by a health plan, and lose your job, have your hours reduced, or get laid off and lose coverage as a result, you and your dependents may qualify for COBRA continuation coverage. COBRA coverage gives you the option to continue purchasing health insurance from your employer’s plan, without further qualification for coverage. The cost is usually the same as if your employer was otherwise paying for such insurance, plus an administration charge of up to 2% of the premium.
Losing coverage as a result of these events may also trigger a special enrollment right in a spouse’s group health plan. It is very important that you review the alternate plan as soon as possible, because the special enrollment request must usually be made within 30 days of losing your coverage. If you elect COBRA instead of a special enrollment in the spouse’s plan, you will have to remain with COBRA coverage until the next open enrollment period of your spouse’s plan.
If your employer discontinues all its health plans, COBRA continuation coverage will not be available. In that instance, the provider of the group insurance plan may offer to convert the group plan to individual policies. You should check with the provider for such options.
Lastly, if you have unpaid health insurance claims, and the plan sponsor files for bankruptcy, you should remain closely aware of deadlines to file a proof of claim in the bankruptcy case. Although unlikely that an insurer would be allowed to cancel coverage before paying claims, the insurer may refuse coverage because premiums were not paid. In that instance, you may have a claim against your employer, and will need to file a claim to protect that interest.
Will Your Pension Benefits be Reduced or Eliminated?
In the last few years, there has been a wave of highly publicized corporate bankruptcies (such as United Airlines, Delta Airlines, and Delphi) that involved a major showdown regarding pension benefits. In each of those cases, there was a tri-party struggle between 1. the bankrupt company claiming it could not afford the expensive plan, 2. retired and disabled employees who relied on promised pension benefits, and 3. current employees, who on the one hand wanted the bankrupt company to fulfill its promises to employees, but on the other hand, had an interest in the company successfully reorganizing, so jobs would not be lost.
In most cases, these types of disputes arose from employers underfunding obligations to pension plans maintained solely for their employees. When investments failed to achieve returns as projected, those companies failed to make up shortfalls or perhaps were financially unable to make such corrective payments. The pension plans were left unable to pay the promised benefits without some significant adjustments. Corporate bankruptcies were utilized, in combination with collective bargaining agreements, to negotiate modifications to pension and disability benefits for current and retired employees.
In response to that wave of bankruptcies, many of which resulted in the Pension Benefit Guarantee Corporation (PBGC) being forced to step in and incur a substantial liability at taxpayer expense, the Pension Protection Act of 2006 was passed. The Act imposed new minimum funding standards for employers who maintain single-employer and multi-employer defined benefit pension plans. The Act created new standards for projecting returns, and thus redefined minimum contributions to plans. Also, the Act included more stringent provisions for companies to make up shortfalls in plan funding and set timelines for such shortfalls to be cured. The intent of the Act was to prevent underfunded plans and ease the impact on the beneficiaries if plans were underfunded. Also, with more oversight on minimum contributions, the PBGC should be called upon less frequently to assume underfunded pension obligations.
If the Act works as intended (which applies to all pension contributions after January 2007), pension assets should not be at risk when a business declares bankruptcy. Pension monies must be kept separate from the employer’s business assets so, similar to 401(k) contributions, they are not considered property of the estate and not a source of repayment to creditors. Similar to the 401(k) advice above, if pension contributions have been withheld from your paycheck, you should confirm that the amounts deducted were properly forwarded to the pension plan administrator.
You should make yourself aware of whether your pension plan is insured by the PBGC. If a plan is terminated because an employer cannot fund the plan, and the plan does not have enough assets to pay promised benefits, the PBGC will assume responsibility for the plan. The PBGC will pay benefits after termination up to a certain maximum guaranteed amount.
Also like a 401(k), if your pension plan is terminated, all contributions to the plan are considered fully vested.
Generally, employee benefits are protected even if your employer files for bankruptcy protection. However, there are some important steps for employees to take to protect their rights and safeguard their interests. Perhaps most important is to know your plans and benefits, including any reports and earning statements. Careful review of these items, to be sure plans are properly funded before your employer is having financial difficulties, may avoid a great surprise after a bankruptcy is filed.