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The Department of Labors Employee Benefits
Security Administration (EBSA), administers the Employee Retirement Income
Security Act of 1974 (ERISA), which governs retirement plans (including profit
sharing and 401(k) plans) and welfare plans (including health, disability, and
life insurance plans). ERISA also includes the health coverage continuation and
accessibility provisions of the Consolidated Omnibus Budget Reconciliation Act
(COBRA) and the Health Insurance Portability and Accountability Act (HIPAA).
This information sheet focuses on bankruptcys effect on pension plans and
group health plans.
If an employer declares bankruptcy, it will
generally take one of two forms: reorganization under Chapter 11 of the
Bankruptcy Code, or liquidation under Chapter 7. A Chapter 11 (reorganization)
usually means that the company continues in business under the courts
protection while attempting to reorganize its financial affairs. A Chapter 11
bankruptcy may or may not affect your pension or health plan. In some cases,
plans continue to exist throughout the reorganization process. In a Chapter 7
bankruptcy, the company liquidates its assets to pay its creditors and ceases
to exist. Therefore, it is likely your pension and health plans will be
terminated.
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?
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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?
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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 employers 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.
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Summary plan description - A description of your pension and health
plan.
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Summary annual report (not available for some plans) - An annual
summary of the plans finances that may contain names and addresses you
may need to know.
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Earnings and leave statements - These are your pay stubs and may help
you establish your employment dates, compensation, and contributions to a
plan.
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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 employers 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
companys 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 plans 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.
Your group health plan must notify you within 60
days of any reduction in benefits. If a reorganizing employer maintained
several health plans and discontinues most of its plans, you may be eligible to
continue coverage in its remaining plan. If you are covered under your
employers health plan and you lose your job, have your hours reduced, or
get laid off and lose coverage as a result, you and your dependents may qualify
for COBRA continuation coverage. COBRA provides a right to purchase extended
health coverage under your employers plan.
You and your dependents may also have a special
enrollment right in a spouses group health plan. However, you and your
dependents must request enrollment within 30 days of losing your coverage. If
you elect COBRA coverage instead of special enrollment in a spouses plan,
you must exhaust COBRA before you may be eligible for another special
enrollment opportunity.
If, however, your employer discontinues all its
health plans, COBRA continuation coverage will not be available. You will have
to seek other coverage. Other coverage may be available by converting your
employers group health coverage to an individual policy. As mentioned
above, you may also have rights to special enrollment in a spouses
employers plan, or by being an "eligible individual" who is guaranteed
access to individual insurance. The opportunity to buy an individual insurance
policy is the same whether the individual is laid off, is fired, or quits his
or her job.
Special bankruptcy rules may apply if you are
receiving health benefits as a retiree or if your health benefits are the
subject of a collective bargaining agreement.
Finally, if you have unpaid health claims and
your plan sponsor has declared bankruptcy, you may want to consider filing a
proof of claim with the bankruptcy court.
You should contact the EBSA regional office
nearest you if:
-
You
are unable to obtain information or documents about your benefits or related to
your pension or health plan;
-
You
suspect contributions deducted from your pay check have not been deposited to
the plan, your pension benefits are not safe, or the assets are not prudently
invested;
-
You
need information and assistance with unpaid health claims or in obtaining a
certificate of creditable coverage.
Contact EBSA electronically at www.askebsa.dol.gov or call the EBSA
toll-free Hotline at 1.866.444.EBSA (3272) to speak to a Benefits Advisor if
you have questions about your options during a bankruptcy. For more information
about rights to coverage, visit our Web site at www.dol.gov/ebsa.
If your health plan coverage ends, you should
contact your State department of insurance to inquire about your eligibility
for an individual policy under HIPAA.
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
Processing and Technical Assistance Branch 1200 K Street, NW
Washington, DC 20005 Tel: 1.800.400.7242
This fact sheet has been developed by the U.S.
Department of Labor, Employee Benefits Security Administration, Washington, DC
20210. It will be made available in alternate formats upon request: Voice
phone: 202.693.8664; TTY: 202.501.3911. In addition, the information in this
fact sheet constitutes a small entity compliance guide for purposes of the
Small Business Regulatory Enforcement Fairness Act of 1996. |