What Happens to Employee Retirement Plans When a Company Goes Bankrupt?

Having your employer declare bankruptcy can be scary, especially if you have retirement plan funds to worry about. But stay calm: The U.S. government has your back. It offers some protection to employees who find themselves in this situation, and in most cases, you will still receive all of the benefits to which you are entitled.

ERISA Protection

All employee retirement plan assets are protected under the Employee Retirement Income Security Act of 1974. ERISA requires companies to keep their workers' retirement plan accounts separate from the company's operating accounts. Retirement plan funds may not be used to pay the company's creditors during a bankruptcy liquidation.

PBGC Protection

In addition to ERISA's protection against misuse of retirement assets, defined benefit plans also offer the security of insurance by the Pension Benefit Guaranty Corporation. In a defined benefit plan, the employee is guaranteed a minimum level of annual income based on his years of service with the employer. If the employer terminates the plan and does not have sufficient funds to pay out the required employee pensions, the pension corporation will step in and make up the difference, up to a specified limit. The limit is based on the age of you and your spouse on the day the plan terminates. Pension corporation insurance also covers any early retirement, disability or spousal annuity benefits provided by the company's retirement plan.

Plan Termination

Whether a retirement plan will be terminated or not depends on the type of bankruptcy the company has filed. In a Chapter 7 liquidation, the retirement plan will be terminated and the assets distributed to the employees. If the company chooses a Chapter 11 bankruptcy, it will be allowed to reorganize and continue its business operations. It may decide to keep the retirement plan in place as a way to attract new employees or retain its existing staff.


Standard tax and penalty rules apply when you take a distribution from any retirement plan, even if you are forced to take your money prematurely because of the company's bankruptcy. You will be taxed on the entire distribution and subject to mandatory federal and state tax withholding. If you are not 59 1/2 years old on the distribution date, you must also pay a 10 percent early withdrawal penalty. You can avoid these taxes and penalties by rolling your money over to an IRA within 60 days.

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About the Author

Denise Sullivan has been writing professionally for more than five years after a long career in business. She has been published on Yahoo! Voices and other publications. Her areas of expertise are business, law, gaming, home renovations, gardening, sports and exercise.

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