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

Your job may be at risk if your employer goes bankrupt, but your retirement benefits are usually safe. Most retirement plans are protected by federal law, so your current savings won't be lost when the company goes under. However, it could stop you from contributing any more money to the plan.


In Chapter 7 bankruptcy, your employer closes its doors and sells off assets to pay creditors. The money in your 401k, 403b or similar plans is safe: The Employee Retirement Security Act keeps those accounts off-limits to creditors. Once the company closes, your plan shuts down with it; you can't fill it with any more money. In Chapter 11, the company "reorganizes" its debt load to stay in business. ERISA still protects your account, and the company may be able to keep the retirement plan going.


Pensions are sometimes called defined-benefit plans because, unlike a 401k, they guarantee a certain level of income in retirement. ERISA protects pensions as well as defined-compensation plans. If it turns out your company shortchanged the pension fund, the federal government guarantees to make good whatever pension, annuity and disability benefits you've earned working there. It can't, however, guarantee death benefits. If your company stays in business during Chapter 11, your pension plan may keep accruing benefits.

Deferred Compensation

Deferred-compensation gives high-salaried employees a tax break. Under these plans, an employee postpones some of his salary until he's in a lower tax bracket. That might not happen until he retires, or leaves the company. The catch is the pay isn't covered by ERISA and isn't held separately from the company's other accounts. Bankruptcy law treats deferred compensation like one more asset: If the company needs the money to pay its creditors, you lose.


If your employer, or a former employer files bankruptcy, contact the plan administrator immediately. Find out the status of the plan and provide your contact information so the administrator can always send you updated information. When you leave a job, keep information on the plan on file, such as the summary plan description, and the last statement of your benefits. That will help establish how much you're owed if the government takes over the plan.

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