What Happens If Your Employer Goes Broke?

You might still get health and retirement benefits depending on the type of bankruptcy protection for which it files.

What will happen to my health insurance and retirement plans if my employer files for bankruptcy?

If the company files for Chapter 11 bankruptcy protection, it could end up restructuring, and your benefits may not be affected. But the employer is likely to cut back on some of your benefits even if it continues to operate.

On the other hand, if the company files for Chapter 7 bankruptcy and shuts down, its benefits plans will be terminated. But several laws protect the benefits you've already accrued and can help you find health coverage.

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Your 401(k) plan. Assets must be held in a separate trust that the employer -- or its creditors -- can't touch, regardless of the employer's financial situation. If your employer files for Chapter 11 bankruptcy, it could continue to administer its 401(k) plan, but it may discontinue matching contributions. However, there's nothing to protect you from any loss in value of the investments -- which can be a big problem if you have a lot of company stock. That's why it's important not to invest all of your 401(k) money into company stock.

If the company shuts down, the 401(k) plan will be terminated and the assets will be distributed to the participants. Then you can roll over the money into an IRA.

If you have problems accessing your money, contact the U.S. Department of Labor's Employee Benefits Security Administration (866-444-3272; www.dol.gov/ebsa).

Your pension plan. When an employer files for Chapter 11 bankruptcy, the bankruptcy court decides whether the company can continue to cover its pension obligations.

If the court decides that the company cannot pay the obligations, or if the company shuts down, then the pension plan will be terminated. The Pension Benefit Guaranty Corporation guarantees the benefits up to $51,000 per person in 2008 (for people retiring at age 65; the guarantee is lower or higher for people retiring earlier or later). Contact the Pension Rights Center if you are having trouble receiving your pension.

Your health insurance. You may continue to get coverage if your employer filed for Chapter 11 bankruptcy. If you lose your job but your employer is still offering health insurance to its employees, you can continue coverage in the group plan through COBRA for up to 18 months. Retirees can continue coverage through COBRA, too, if the employer stops offering coverage to them but continues offering it to current employees. You'll pay more under COBRA than what you paid for health insurance through your employer, so you might be able to find a better deal on your own if you're healthy. Check prices at eHealthInsurance.com, or find an agent to help through the National Association of Health Underwriters.

If the employer discontinues its health-insurance coverage, then you won't be able to get COBRA coverage. Instead, you may be able to sign up for your spouse's health-insurance plan even if it's not yet open-enrollment season (as long as you sign up within 30 days of losing your coverage).

If you can't get other coverage, then you may have the right to convert to an individual plan without preexisting-condition exclusions. The policy continuation rules vary by state; contact your state insurance department for details (go to the insurance page of Kiplinger.com for links).

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.