For many employees, a company pension is not just a benefit but a cornerstone of retirement planning, providing financial stability through consistent income during their retirement years. This income is crucial for covering everyday expenses from health care to housing. However, the prospect of a company going bankrupt raises serious concerns about the security of pension funds.
Understanding the potential impacts on your pension and the safeguards in place can help you navigate these unsettling scenarios. Here’s what you need to know if your company faces bankruptcy.
The Role of the Pension Benefit Guaranty Corporation (PBGC)
Established by the Employee Retirement Income Security Act of 1974, the PBGC is a federal agency that plays a critical role in protecting the retirement incomes of millions of Americans. Its primary function is to insure certain types of defined benefit pension plans. According to John F. Pace, a certified public accountant with Pace Fiduciary Accounting in Alpine, Texas, “This federal agency ensures that pensions are protected up to a certain limit, even in the event of your employer’s bankruptcy.” However, it’s important to note that the coverage might not fully match the original benefits promised by your employer.
Is Your Pension Insured?
The PBGC covers two main types of pension plans: single-employer plans (set up by your company specifically for its employees) and multiemployer plans (shared among workers from different employers within the same industry). Most private-sector defined benefit plans fall under the PBGC’s protection, but there are exceptions. It does not cover:
- Government pensions at federal, state, and local levels.
- Military pensions.
- Pensions from religious institutions.
- Small professional practice pensions, like those for small medical or law offices.
- Investment plans like 401(k)s, IRAs, and profit-sharing plans.
- Health benefits and employee stock ownership plans.
To confirm whether your pension is covered, you should request the pension’s summary plan description from your employer.
Guaranteed vs. Non-Guaranteed Benefits
In the event of a bankruptcy, the PBGC guarantees basic pension benefits up to certain limits. These include:
- Pension payments starting from your normal retirement age.
- Survivor annuities if you pass away.
- Disability benefits (if the disability occurred before the end of the plan).
- Most early retirement benefits.
However, the PBGC does not guarantee severance packages, vacation pay, post-bankruptcy disabilities, health and welfare benefits, or lump-sum death benefits if death occurs after the plan ends.
What to Do if the PBGC Takes Over Your Plan
If your company’s pension plan is terminated and taken over by the PBGC, the agency will review plan records to determine owed benefits. If you are already receiving a pension, you will continue to receive payments without interruption. If you are nearing retirement, you can contact the PBGC’s customer care center about six months before your benefits are scheduled to begin to ensure everything is in order. They can be reached online or at 1-800-400-7242.
For those with smaller total benefits, the PBGC offers options for lump-sum payments. If your total benefit is $5,000 or less and your plan terminated before 2024, or up to $7,000 if the plan ends in 2024 or later, you can opt for a lump-sum payment which can be rolled over tax-free into an IRA.
Preparing for the Future
While the protection of the PBGC provides significant reassurance, the best strategy for securing your financial future involves multiple layers of planning:
- Understand your pension details: Be clear on what your pension offers and the extent of PBGC coverage.
- Stay informed: Keep abreast of any news or changes related to your company’s financial health and how it might affect your pension.
- Consider additional retirement savings: Depending on your financial situation, it may be wise to diversify your retirement savings with other investment vehicles such as IRAs or 401(k) plans.
The thought of a company going bankrupt can be daunting, especially when your future income is at stake. However, understanding your rights and the protections available can help you navigate these challenges more effectively, ensuring that you remain prepared for whatever may come your way in your retirement years.
