How Company Bankruptcy Affects Your Retirement Funds

Your company may have filed for bankruptcy, and you're wondering, how does declaring bankruptcy affect retirement funds? Declaring bankruptcy can affect retirement funds, depending on if the company is filing to reorganize finances, or paying off creditors.

As an employee in a bankruptcy situation, the two most important issues concerning your retirement funds are being able to collect retirement funds, and making sure your retirement funds are safe from the bankruptcy.

Your retirement funds are generally protected in a bankruptcy in the following ways:

1. Retirement funds are kept separate from employer's business assets. Under the Employee Retirement Income Security Act (ERISA), retirement funds must be sufficiently funded, and either placed in a trust, or invested in an insurance contract.

2. Plan administrators cannot mismanage or abuse retirement funds. Confirm with plan administrators that retirement funds that have been deducted from your pay have been forwarded to either the company trust account, or insurance contract.

3. Your retirement funds may be insured by the Federal Government. A defined benefit plan through your employer is protected by the Pension Benefit Guaranty Corporation. (PBGC). Terminating the plan because of bankruptcy, and inadequate plan funding, will result in the PBGC taking responsibility for the retirement plan, and paying benefits up to a maximum guaranteed amount. Payments for plans that an employee contributes to, such as a 401(k), are not insured by the PBGC.

4.If plan is terminated, funds must be 100% vested. Your retirement plan owes you all retirement benefits that you have accumulated. Payment of retirement funds under ERISA guidelines does not have to take place until you reach normal retirement age, which is usually age 65, but check your plan to see if you can receive your retirement funds at an earlier age. Some plans require employees to be separated from employment for a certain length of time.