So your long-time employer is declaring bankruptcy, re-organizing, or worse, closing its doors for good. Fine, you never liked that job anyway. You'll cash in your chips, downsize, move to the lake, and finally open that bait and tackle shop you always dreamed of. Heck, you might even rent rowboats while you're at it.
But wait. What about those chips? Your employer was one of the "Old Guard", one of the few companies still around "generous" (or, some would say, "naiive") enough to still be offering its loyal employees a pension plan, and you've stuck it out there for a lot of years expecting on that pension to carry you through your retirement years. What will happen to it now that the company is declaring bankruptcy?? What will happen to you?
As an employer begins moving through the bankruptcy process, the questions surrounding the fate of the pension plan become highly charged and difficult to solve. This is because there can be so many affected parties: the employer administering the plan, the members (and creditors) of the debtor-employer's controlled group, retirees, active employees and their union, the Pension Benefit Guaranty Corp. and, perhaps, the plan's independent fiduciary, may all become active participants, some with competing interests.
There are many ways that the scenario could play out, depending upon the financial condition of the company, whether unions have engaged in a collective bargaining agreement which obligates the company to continue funding the plan, or a whole host of other factors. What if the company's fiscal condition is so bad that it will be impossible for it to continue funding the pension plan at all?
Members of Congress considered just such a scenario way back in 1974 and created the Pension Benefit Guaranty Corporation (PBGC) as a safety net for employees. In return for premium payments made by participating companies, the PBGC guarantees a benefit to current and future retirees when a pension plan is under-funded, if the plan runs out of money altogether, or if the company sponsoring the plan cannot continue to stay in business if it continues to fund its plan.
When the PBGC takes over a pension plan, all new benefit accruals and vesting terminate. Other plan provisions, such as certain early retirement privileges, disability and survivor benefits, might be preserved if they don't exceed the maximums allowed under PBGC rules. However, other benefits included in the original plan provisions, such as severance payments and death or disability benefits after plan termination, are typically not guaranteed.
To date, more than one million workers and retirees have received financial assistance from the PBGC. In 2008 alone, the PBGC paid out more than $4 billion in benefits to the retirees of terminated pension plans. And, with this difficult economy, it's more than likely that the PBGC will have another big payout year in 2009 even though maximum guaranteed benefits are limited by statute and adjusted annually.
Several factors determine how much a person can receive from the PBGC. The guaranteed amount depends upon the type of plan, when the plan termination occurs, the type of PBGC involvement, and other factors. For single-employer plans that terminate in 2009, the maximum guarantee is $4,500 per month ($54,000 per year) for a single-life annuity commencing at age 65. The maximum is reduced if the worker retires at a younger age: at age 62, the guarantee is $3,555 per month. At age 55, the maximum is only $2,025 per month. All of these totals are reduced for annuities that continue to pay a portion of the monthly benefit to a retiree's surviving spouse.
In addition to being subject to these limits, you might lose the right to take your benefit as a lump sum or to roll it over into an IRA if the pension plan becomes subject to PBGC rules. This may have an effect on your financial and retirement planning. So before you pick out the perfect spot for your hammock at the lake, you need to make sure that the pension payout you receive is adequate to cover all of your expenses.
For more information about the potential effect of your employer's bankruptcy on your own benefits, contact your plan administrator. You may also go to the PBGC Web site, www.pgbc.gov, or call (800) 400-7242. The U.S. Department of Labor's Employee Benefits Security Administration can also be reached online at www.askebsa.dol.gov or by calling (866) 444-3272.
If you are worried about not being able to meet your financial commitments due to a decrease in your expected pension benefits, you should seek the advice of a qualified bankruptcy lawyer to determine if clearing your debts through bankrupcty would help. Bankruptcy could mean the difference between a financially tight and tense retirement or one that is stress-free and filled with choices.