Chapter 11 bankruptcy usually does not affect your pension
or health plan (although there are exceptions). In most cases, plans continue to exist throughout the reorganization process.
When your employer files for bankruptcy you should contact the administrator of each plan or your union representative (if you are represented by a union) to request an explanation of the status of your plan or benefits. The summary plan description will tell how to get in touch with the plan administrator. Questions that you may want to ask include:
Will the plan continue or will it be terminated?
Who will be acting as plan administrator of the plans during and after the bankruptcy, and who will be the trustee in charge of the pension plan?
If the pension plan is to be terminated, how will accrued benefits be paid?
Will COBRA continuation coverage be offered to terminated employees?
If the health plan is to be terminated, how will outstanding health claims be paid, and when will certificates of creditable coverage (showing, among other things, the dates of enrollment in your employer's health plan) be issued?
Know the plan rules that govern the way your pension assets and health benefits are treated when the plan is terminated. The following documents contain valuable information about your health and pension plans and should be helpful to you. You should be able to obtain most of them from your plan administrator, employer, or union representative.
Summary plan description - A description of your pension and health plan.
Summary annual report (not available for some plans) - An annual summary of the plan's finances that may contain names and addresses you may need to know.
Earnings and leave statements - These are your pay stubs and may help you establish your employment dates, compensation, and contributions to a plan.
Certificate of creditable coverage (available upon request even if you still have health coverage and provided automatically when your health coverage ceases) - A certificate of creditable coverage is a statement of your past health care coverage with your employer.
Individual benefit statements showing how much money is in your retirement account (for individual account plans) or the value of your pension benefit (for defined benefit plans).
Workers in bankruptcy situations face two important issues when it comes to their retirement benefits: access to pension benefits and the continued safety of their pension assets. Generally, your pension assets should not be at risk when a business declares bankruptcy, because ERISA requires that promised pension benefits be adequately funded and that pension monies be kept separate from an employer's business assets and held in trust or invested in an insurance contract. Thus, if an employer declares bankruptcy, the retirement funds should be secure from the company's creditors. In addition, plan fiduciaries must comply with the ERISA provisions that prohibit the mismanagement and abuse of plan assets. If contributions to a plan have been withheld from your pay, you may want to confirm that the amounts deducted have been forwarded to the plan's trust or insurance contract.
In addition, some pension benefits may be insured by the Federal Government. Traditional plans (defined benefit plans) are protected by the Pension Benefit Guaranty Corporation (PBGC), a Federal Government corporation. If a plan is terminated because an employer has financial difficulty and cannot fund the plan, and the plan does not have enough money to pay the promised benefits, the PBGC will assume responsibility for the plan. The PBGC pays benefits after termination up to a certain maximum guaranteed amount. On the other hand, defined contribution plans, such as 401(k) plans, are not insured by the PBGC.
In the event the pension plan is terminated, the plan must vest your accrued benefit 100 percent. This means that the plan owes you all the pension benefits that you have earned so far, even benefits you would have lost if you had voluntarily left your employment. ERISA does not require that pension benefits be paid out before normal retirement age, usually age 65. Your plan may provide for distribution sooner than this. Some plans require participants to reach a certain age before benefits will be distributed, and some require the participant to have been separated from employment for a specified period of time. You should review the summary plan description for the plan rules regarding payment of benefits. Also remember that taking a distribution of pension benefits before retirement may have important tax consequences. You may need to consult with a tax advisor before accepting the distribution.