Will You Still Receive Your Pension If Your Former Employer Goes Bankrupt?

If you are entitled to a pension from a former employer based on your years of service and the company subsequently goes bankrupt, that doesn't mean that you won't receive your pension. The company's pension plan may not be terminated, and in any event your pension may be protected by federal government insurance.

As explained by the U.S. Department of Labor, the Employee Benefits Security Administration administers the Employee Retirement Income Security Act (ERISA) of 1974, which governs and sets minimum standards for pension and employee benefit plans. This Act set up the Pension Benefits Guaranty Corporation, a federal agency that protects pension plans in the private sector.

The status of the company's pension plan may depend on the type of bankruptcy filed. Under a Chapter 11 bankruptcy the company attempts to reorganize and continues in business under a court's protection. In this case the pension plan may continue. A Chapter 7 bankruptcy is a liquidation in which the company ceases to exist. But as indicated by the Pension Benefits Guaranty Corporation (PBGC) the termination of a pension plan is an event separate from bankruptcy.

ERISA requires pension plan assets to be set up in a trust, separate from other company assets. Pensions are defined benefit plans that pay retirement benefits based on your pay while you worked for the company, your years of service, and your age. The company contributes to the pension fund and fund assets are invested. The ability of the fund to pay pension benefits will depend on whether the fund is fully funded or underfunded, and will also depend on market conditions and the performance of the fund's investment portfolio.

If a pension plan is terminated as a result of bankruptcy and there are insufficient funds to pay all the pension benefits, the PBGC steps in and pays the pension benefits up to a certain maximum amount. If your former employer plans to terminate a pension plan, the plan administrator must notify you in writing at least 60 days in advance, with a Notice of Intent to Terminate.

According to the PBGC, if the termination of the pension plan is a standard termination, after the Notice of Intent to Terminate, you should receive a second letter called the Notice of Plan Benefits that describes the pension benefits you will receive. You should receive this letter within six months after the proposed plan termination date.

If the plan does not have enough funds to pay all the pension benefits, or if the PBGC initiates the termination, the PBGC will contact you when they take over as trustee of the pension plan. The PBGC reviews the pension plan records and determines how much will be paid to each beneficiary. The maximum guaranteed pension benefits that the PBGC can pay (for 2011) are $4,500 per month, or $54,000 a year for workers who begin receiving payments at age 65.

If you are already retired, you will continue receiving pension benefits, but the amount may change. If you have not yet retired, the estimated benefits calculated by the PBGC will be paid to you when you become eligible.

As recommended by the Employee Benefits Security Administration, when your current or former employer files for bankruptcy, you should contact your pension plan administrator or your union representative. You can find information on your plan administrator in the summary plan description. If you don't have one, you can request it. You can ask whether the pension plan will continue or be terminated, who will be acting as plan administrator and trustee, and if the plan is terminated, how your accrued benefits will be paid.

If you don't get the answers or information you need, you can contact the Employee Benefits Security Administration and/or the Pension Benefits Guaranty Corporation.

Sources:

Contact Us, Pension Benefits Guaranty Corporation

Fact Sheet: Your Employer's Bankruptcy -- How Will It Affect Your Employee Benefits? Employee Benefits Security Administration

General FAQs About PBGC, Pension Benefits Guaranty Corporation