How Does Employer Bankruptcy Affect Pensions?

Every year in the United States new businesses are formed and many businesses close their doors or go bankrupt. If a business goes bankrupt, and that business has employees, then an employee may wonder whether or not their pension plans go with the company. Fortunately for employees, a federal corporation called Pension Benefit Guaranty Corporation (“PBGC”) often insures pension plans.

An individual may also possess either or both federally backed pension benefits and private pensions through their employers. Pension benefits, otherwise referred to as retirement benefits, generally refers to social security benefits in which a person contributes over the course of their working years. These pension benefits are paid out monthly when an individual retires from the workforce, and are based on how much the person earned during their working career.

In order to determine how much federal pension money an individual can expect when you retire, the Social Security Administration (“SSA”) will average a person’s earnings over the course of their career.

However, pension benefits may also be associated with an individual’s private employer. It is important to note that pension plans and associated benefits from private employers are protected by the Employee Retirement Income Security Act, or “ERISA.”

ERISA is a federal law which sets standards and regulations of protection for those who participate in private sector company retirement plans. ERISA requires that set plans provide employees with accurate plan information, and important facts such as:

• The pension plan features and funding, such as employers matching an employee’s contribution to their account;
• The amount of time in which an employee is required to work for an employer before they are allowed to participate in a retirement account;
• Information regarding the minimum standards required for participation;
• Information regarding survivors benefits;
• Information regarding benefit accrual;
• information regarding vested retirement benefits;
• Information regarding the management and control features the employee has;
• Information regarding the claims and appeals process for participants; and
• Information regarding the right to sue for breach of benefits.

What Are the Types of Bankruptcies and Pension Plan Obligations?

Bankruptcy is the legal process that a person or business initiates when they cannot meet their financial obligations. Through bankruptcy, debtors liquidate their assets or restructure their finances to fund or eliminate their debts that they cannot pay. There are many types of bankruptcy, and all of the different forms are defined and governed under federal law.

The type of bankruptcy that a business chooses to file will determine the options available to the business moving forward, as well as any employees of the business. There are many different types of bankruptcy that a business may choose to initiate bankruptcy proceedings, however the main two bankruptcies utilized by businesses include:

• Chapter 11 Bankruptcy: Chapter 11 is a reorganization bankruptcy available to businesses that want to restructure their finances.
  • In a Chapter 11 bankruptcy, the company is likely to continue operating, which means employees may not completely lose their benefits.
  • However, an employer may no longer match or be obligated to match an employee’s payments in a defined contribution plan; and
• Chapter 7 Bankruptcy: Chapter 7 bankruptcy is often referred to as “liquidation” because the business’ property and assets may be sold to resolve their debts.
  • If the company is filing for Chapter 7 bankruptcy, an employee’s pension benefits will be jeopardized more seriously, and they may lose their benefits entirely.

Another chapter of bankruptcy that may be utilized by businesses is chapter 14 bankruptcy. Chapter 14 bankruptcy is generally for larger corporations and businesses.

What Are the ERISA Protections for Pension Benefits?

As mentioned above, pension plans and associated benefits from private employers are protected by the ERISA. ERISA requires a separation of the plan assets from the employer’s assets. ERISA also requires that employee retirement plan funds are kept in trust or invested in an insurance contract.

Through the ERISA protections, a company’s creditors generally cannot use pension plan funds to satisfy any outstanding debts of the company, even in the bankruptcy process. Additionally, a company cannot satisfy a judgment debt by dipping into their employee pension plan funds. However, an employee may need to double-check that their contributions are appropriately sent to the plan’s insurance contract or trust to ensure they are protected.

Are There Any Further Protections in Case of Bankruptcy?

In addition to the ERISA protections discussed above, Many regular employee pension plans (i.e. defined benefit plans) are also backed by the Federal Pension Benefit Guaranty Corporation. In the case of bankruptcy, the PBGC will pay up to a certain limit if an individual’s employer goes bankrupt and is unable to pay.

However, it is important to note that the PBGC pays only up to a certain level. Further, the PBGC protections apply to the following defined benefit plan’s benefits:

• Vested retirement benefits;
• Some survivors benefits; and
• Benefits related to early retirement.

In addition to all of the above, there is also the Pension Protection Act of 2006 (“PPA”). The goal of the PPA was to reform pension law and ensure that employee pension plans are fully funded and able to pay pensions to employees as promised.

What Are Some Additional Risks?

As mentioned throughout this article both ERISA and PBGC provide some legal protections for employees’ pensions and pension benefits. However, there are also risks that an employee must also keep in mind regarding employer bankruptcy and their pensions:

• Creditors’ claims may still apply to and reach deferred compensation plans and plan funds;
• ERISA may not protect other important employee benefits, such as an employee’s ability to maintain their health insurance; and
• If an employee’s health plan is canceled, a terminated employee may not be able to take advantage of the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) which gives some employees the ability to continue health insurance coverage after leaving employment.

What Should I Ask My Employer?

The first thing that any employee participating in a private employer pension plan should understand is how the employee claims their benefits. The first step in claiming your pension benefits is to contact the pension plan administrator. It is important to note that before claiming your benefits, you should read the summary plan description, which should have been provided by the administrator.

Among other things, the summary plan description for an employee’s pension should contain:

• Procedures for filing pension benefits claims;
• They types of benefits the employee’s pension plan provides, including welfare benefit plan;
• How benefits may be obtained, and under what circumstances those benefits may be lost, including what may occur in the instance of the company filing bankruptcy; and
• A summary of ERISA protections applicable to the employee’s specific plan.

An employee should also ask whether or not their pension plan is insured by PBGC. If so, the employee should take steps to learn about PBGC at pbgc.gov and how the maximum monthly benefits may affect the employee. Finally, an employee should understand their company’s financial position and make a plan to prepare for any changes such as bankruptcy

Do I Need an Attorney?

If your pension has been jeopardized as a result of your company filing for bankruptcy or completing a bankruptcy, then it is in your best interests to consult with an experienced workers compensation lawyer. An experienced attorney will be able to help answer any questions you may have regarding your pension plan and pension benefits.

Additionally, an attorney may also be able to protect your pension from creditors. Finally, an attorney can also initiate a civil lawsuit against your employer, should they mismanage employee pension funds, and legal action become necessary.