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Chapter 11 Success Stories/Pension and Cash Balance Plans Protected by ERISA and Insured by the PBGC

Posted by Aaron Juckett on Sat, Dec 20, 2008
  
  
  
  
With all of the recent stories about the Bankruptcy Filings of companies such as the Tribune Company, I am often asked about what will happen to the retirement benefits of the participants. Here are some items to consider:
  • Is the Bankruptcy Filing a Chapter 11 Reorganization or a Chapter 7 Liquidation? When many people think of bankruptcy, they automatically think of a Chapter 7 liquidation. In a Chapter 11 Reorganization, the company will generally continue to exist. Companies that are considered to be Chapter 11 success stories include Texaco, Continental Airlines, Southland Company (7-Eleven), Macy's, and Toys-R-Us.

  • Pension benefits are protected in bankruptcy by the Employee Retirement Income Security Act of 1974 (ERISA). The Department of Labor (DOL) has a guide that provides additional information about how a bankruptcy will affect your benefits: Fact Sheet: Your Employer's Bankruptcy - How Will It Affect Your Employee Benefits?

    Workers in bankruptcy situations face two important issues when it comes to their retirement benefits: access to pension benefits and the continued safety of their pension assets. Generally, your pension assets should not be at risk when a business declares bankruptcy, because ERISA requires that promised pension benefits be adequately funded and that pension monies be kept separate from an employer's business assets and held in trust or invested in an insurance contract. Thus, if an employer declares bankruptcy, the retirement funds should be secure from the company's creditors. In addition, plan fiduciaries must comply with the ERISA provisions that prohibit the mismanagement and abuse of plan assets. If contributions to a plan have been withheld from your pay, you may want to confirm that the amounts deducted have been forwarded to the plan's trust or insurance contract.

  • The Fact Sheet also discusses how insurance for defined benefit plans (including pension and cash balance plans) is provided by the Pension Benefit Guaranty Corporation.

    In addition, some pension benefits may be insured by the Federal Government. Traditional plans (defined benefit plans) are protected by the Pension Benefit Guaranty Corporation (PBGC), a Federal Government corporation. If a plan is terminated because an employer has financial difficulty and cannot fund the plan, and the plan does not have enough money to pay the promised benefits, the PBGC will assume responsibility for the plan. The PBGC pays benefits after termination up to a certain maximum guaranteed amount. On the other hand, defined contribution plans, such as 401(k) plans, are not insured by the PBGC.

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2012 IRS Pension Plan Limits

401(k) Deferral Limit - $17,000

Annual Additions Limit - $50,000

Maximum Compensation Limit - $250,000

Catch-Up Contribution Limit - $5,500

Highly Compensated Employee - $115,000

ESOP 5-Year Distribution Threshold - $1,015,000

ESOP Additional Year Threshold - $200,000

2012 Pension Plan Limits

1989 - 2012 Plan Limits

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