What Happens to Pensions When Companies Go Bankrupt?

What Happens to Pensions When Companies Go Bankrupt?
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In the 12 months ending in March 2012, 46,393 businesses filed for bankruptcy. If you’re an employee of a bankrupt business, not only do you usually lose your job, you might worry about losing your pension as well. The Employee Retirement Income Security Act, commonly known as ERISA, requires employers to meet certain requirements designed to protect your pension plan. If your company files for bankruptcy protection, know the right questions to ask to gather the information you’ll need to make informed decisions about your retirement.


ERISA was passed into law in 1974. The law requires employers to keep pension funds separate from other assets and to provide regular reports to plan participants about the health of the plan, and it regulates how plans are administered.

ERISA also established the Pension Benefit Guaranty Corp., a federal program that guarantees benefits in traditional pension plans, even if the plan is terminated because of bankruptcy or other reasons. The Pension Benefit Guaranty Corp. protects "defined benefit" pensions the same way the Federal Deposit Insurance Corp. protects money in bank accounts.

Types of Bankruptcy

Companies usually file bankruptcy under either Chapter 11 or Chapter 7 of U.S. bankruptcy law. Chapter 11 files are reorganizations of the company assets. In most Chapter 11 filings the company continues to operate, and your pension might continue as usual.

With a Chapter 7 bankruptcy, the company has to sell, or liquidate, all its assets, and the company no longer exists. Because the law requires pension assets to be separate from other assets, this money can’t be touched. But the pension plan will no longer grow, and you can no longer accumulate more benefits.

Termination of Pension

When a company terminates its pension plan, this means only that you will no longer accumulate more pension credits, and that no new participants will be added to the pension fund.

The law requires a company to fully vest all your benefits when the plan terminates. This means that you are entitled to 100 percent of any money you invested in the pension, as well as 100 percent of the money the company invested on your behalf. This is true even if you haven’t yet worked enough years to be entitled to 100 percent of the benefits -- for example, if you had quit your job or had been laid off. The plan may pay out all the money at the time of termination, or it may hold your money until you turn 65 or some other retirement age spelled out in the original plan documents.

The company gets to decide how to handle payouts. If the company decides to pay out everything now and you haven’t yet reached retirement age, you might owe tax on the amount you receive.

Actions You Should Take

Contact your pension plan administrator to find out how your company pension will be handled during bankruptcy. Read the pension reports and documents you’ve been given up until now; these documents might include an explanation of what will happen if the company goes bankrupt. Know how much money is due you. You might be able to find this in the annual report the pension fund is required to send you. If you are unable to find out the information you need, you can contact your local ERISA office for help.