What Happens to My Pension if My Company Goes Bankrupt?

Certain benefits are guaranteed if your pension plan fails.

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You served your company faithfully for a couple of decades and as a reward for your hard work, your company gave you a pension. Congratulations, you achieved part of the American dream. But what happens if the company providing your pension goes bankrupt?

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A federal corporation, the Pension Benefit Guaranty Corporation (PBGC), was created in 1974 by the Employee Retirement Income Security Act to answer this question. The PBGC is insuring the pension plans of over 44 million private-sector workers and retirees. PBGC guarantees basic benefits that you earn before your plan's termination date or the date your employer files bankruptcy. If your plan terminates without sufficient cash to pay all benefits, the insurance program of PBGC will pay you guaranteed benefits up to the pension limits set by law.

Is my pension plan covered under the PBGC? If your pension plan promises to pay you a specific monthly benefit when you retire, the PBGC probably insures your plan. Profit sharing or 401(k) plans are not covered, nor are professional service employers including lawyers and doctors with less than 26 employees. To find out for sure whether or not your pension plan is covered, ask your employer for a copy of the pension's summary plan description.

[See The Risks of Contributing Too Much to a 401(k) or IRA.]

Guaranteed basic benefits. If your company goes bankrupt, the following basic benefits are guaranteed by the PBGC:

  • Receipt of pension benefits upon your normal retirement age
  • Annuity benefits for your survivors if you should pass away
  • Disability benefits
  • Most early retirement benefits
  • 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 plan's termination date
    • Health and welfare payments
    • Lump-sum death benefits for deaths occurring after the plan ends
    • What to expect if the PBGC takes over your pension plan. If the PBGC takes over as the trustee of your pension plan, they will review the plan records and determine the benefits owed to each person. If you already receive a pension, you'll continue receiving that amount without interruption while the policy is reviewed. If you have not yet retired, you'll receive an estimated benefit when you apply to the PBGC to begin your pension payments. Contact the customer care center of PBGC about four months before you expect your pension benefits to begin at 1-800-400-7242.

      [See 10 Retirement Myths.]

      PBGC makes most pension benefit payments with electronic direct deposit, but you can make a request to receive a paper check instead. If your total benefit is $5,000 or less, you may request a one-time lump sum payment. You can have PBGC pay this lump sum directly to your IRA if you choose, which is considered a tax-free rollover of the funds.

      Ryan Guina is a U.S. military veteran, writer, and professional in the corporate world. He blogs at Cash Money Life and The Military Wallet.