Earned through years of service to an employer, a company pension can be a significant source of income for retirement. Those who receive pensions often rely on them to pay for health care, housing and other essential retirement expenses.
But what happens if the company providing your pension goes bankrupt? In these cases, it’s important to understand the fine print of your pension and how your finances can be impacted.
Follow these guidelines when navigating the potential bankruptcy of your pension provider:
— Understand the Pension Benefit Guaranty Corporation.
— Find out if your pension is insured.
— Check on basic guaranteed benefits.
— Look at non-guaranteed benefits.
— Be prepared if the PBGC takes over your plan.
Understand the Pension Benefit Guaranty Corporation
The PBGC is a federal corporation created in 1974 by the Employee Retirement Income Security Act. It insures defined-benefit pension plans, which are traditional pensions that pay a determined amount every month, starting when you retire. “This federal agency ensures that pensions are protected up to a certain limit, even in the event of your employer’s bankruptcy,” said John F. Pace, a certified public accountant at Pace & Associates in Austin, Texas, in an email. “However, note that the PBGC’s coverage may not fully match the benefits you were initially promised by your employer.”
[READ: 9 Jobs That Still Offer Traditional Pensions]
Find Out if Your Pension Is Insured
The PBGC insures two types of defined benefit pension plans: single-employer pension plans, in which a company sets up a pension for its employees, and multiemployer pension plans, which cover workers of more than one employer, often within the same industry.
If your pension plan promises to pay you a specific monthly benefit when you retire, the PBGC probably insures your plan. It covers most private-sector pension plans.
However, there are some exceptions. The PBGC does not cover:
— Federal, state and local government pensions
— Military pensions
— Pensions associated with religious institutions
— Pensions for small professional practices, such as a small doctor’s or lawyer’s office
— 401(k) plans
— IRAs
— Profit-sharing plans
— Health benefits
— Employee stock ownership plans
— Thrift savings plans
— Money purchase plans
To confirm whether your pension plan is covered, ask your employer for a copy of the pension’s summary plan description.
[READ: What’s the Difference Between a Pension Plan and a 401(k)?]
Check on Basic Guaranteed Benefits
“If your company goes bankrupt, you’re likely to get at least part of your pension,” said Rhett Stubbendeck, CEO of Leverage Planning in Omaha, Nebraska, in an email.
The PBGC guarantees these basic benefits:
— Receipt of pension benefits upon your normal retirement age
— Annuity benefits for your survivors if you pass away
— Disability benefits
— Most early retirement benefits
The guarantee only applies to benefits that are earned before the plan terminates.
Look at Non-Guaranteed Benefits
While the PBGC does a lot to protect your pension if your company goes bankrupt, it’s unable to guarantee the following benefits:
— Severance packages
— Vacation pay
— Disabilities that occur after the bankruptcy begins or after the plan’s termination date
— Health and welfare payments
— Lump-sum death benefits for deaths occurring after the plan ends
[READ: Retirement Accounts You Should Consider.]
Be Prepared if the PBGC Takes Over Your Pension Plan
If the PBGC takes over as the trustee of your pension plan, it will review the plan records and determine the benefits owed to each person. If you already receive a pension, you will continue receiving that amount without interruption while the policy is reviewed. If you have not yet retired, you will receive an estimated benefit when you apply to the PBGC to begin your pension payments.
You can contact the PBGC customer care center about six months before you expect your pension benefits to begin. PBGC can be reached online or by phone at 800-400-7242. Most pension benefits are paid by electronic direct deposit, but you can request to receive a paper check if you prefer.
You may choose to receive a lump-sum payment if your total benefit is considered to be of small enough value. The amount for this type of cash-out was set at up to $5,000 in 1997. In 2024, it was increased to $7,000. If your benefit fits the requirements, you can elect to have PBGC pay this lump sum directly to your IRA, which is considered a tax-free rollover of the funds.
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What Happens to My Pension if My Company Goes Bankrupt? originally appeared on usnews.com
Update 05/21/25: This story was published at an earlier date and has been updated with new information.
