What If My Employee Pension Plan Terminates As A Result Of My Employer Declaring Bankruptcy?

Q. Abigail G. of West Virginia asks: "What If my Employee Pension Plan Terminates as a result of my Employer declaring Bankruptcy?"

A. Evan from the QDRO Department of Pension Evaluators & QDROS Of Troyan, Inc Associates Groupwrites: "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 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. 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. 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.

You should contact the EBSA regional office nearest you if you are unable to obtain information or documents about your benefits, you suspect contributions deducted from your paycheck have not been deposited to the Plan, or the assets are not prudently invested.

If your retirement Plan is a defined benefit pension Plan, all or a portion of the benefits may be insured by the Pension Benefit Guaranty Corporation (PBGC). For further information contact the Pension Benefit Guaranty Corporation, Administrative Review and Technology Assistance Department, 1200 K Street, NW, Washington DC 20005. The telephone number is (202) 326-4000.

Evan Edelstein

Lead QDRO Consultant