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Are employee retirement benefits affected by employer bankruptcy?

On Behalf of | Jul 8, 2024 | Chapter 7 And Chapter 13 Bankruptcy |

When a company goes bankrupt, it affects more than just its operations and finances. Employees who rely on pension plans for their future can face significant impacts. 

Understanding how bankruptcy affects pension plans can help workers protect their retirement benefits.

Types of pension plans

There are two main types of pension plans: defined benefit plans and defined contribution plans. Defined benefit plans promise a specific monthly payment upon retirement, while defined contribution plans depend on the contributions and investment performance. The type of plan determines how bankruptcy impacts employees’ retirement benefits.

Defined benefit plans in bankruptcy

In New Jersey, if an employer with a defined benefit plan files for bankruptcy, the Pension Benefit Guaranty Corporation (PBGC) steps in. The PBGC is a federal agency that insures most private-sector defined benefit plans. It ensures that retirees receive their benefits up to a certain limit. 

However, there can be reductions to the amount employees receive compared to the original plan promises. The PBGC has maximum benefit limits, which may be lower than the promised pension, especially for those with higher pensions.

Defined contribution plans in bankruptcy

For defined contribution plans, such as 401(k) plans, bankruptcy has a different impact. These plans are usually protected because the funds are held in individual accounts separate from the employer’s assets. 

Employees maintain control over their accounts, and bankruptcy does not directly reduce the funds. However, if the employer stops contributing or matching employee contributions, the growth of these accounts can be affected.

Steps to protect retirement benefits

Employees can take steps to protect their retirement benefits during employer bankruptcy. They should monitor their pension plan’s funding status and stay informed about their company’s financial health. Consulting with a financial advisor can help employees make informed decisions about their retirement savings. Diversifying investments and considering additional retirement savings options outside of employer-sponsored plans can also provide added security.

New Jersey employees need to understand the impact of bankruptcy on pension plans. By staying informed and proactive, employees can better safeguard their retirement benefits against potential risks.

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