What Happens to Pensions When Companies Go Bankrupt?

Pension plans are a type of retirement plan that is funded by a company for the benefit of its employees. The assets are controlled by the company instead of in each individual's name. When a company goes bankrupt, each employee can generally receive the benefits they were entitled to through the normal pension plan.

Defined Benefit

• This type of retirement plan provides a defined benefit for employees of a company. Employers tell the employees how many years of service they have to provide in order to receive a certain amount of retirement benefits. This is different from a 401k or another defined contribution plan in which the employee funds the majority of the account and the employer makes contributions. With a pension plan, it is fully funded by the employer.

Pension Benefit Guaranty Corp.

• In order to combat the problem of companies going bankrupt, the government helped create the Pension Benefit Guaranty Corp. This is a company that insures pension plans in the United States. Companies can pay a particular premium to the PBGC in order to have it insure each person's benefits. If a company goes out of business, the PBGC will step in and make sure that the majority of the benefits that were owed are paid to the employees.

Guarantees

• The Pension Benefit Guaranty Corp. provides coverage for a few different types of benefits. It guarantees the normal retirement benefits that you would receive when you reach retirement. It also guarantees early retirement benefits that you would have been entitled to for your pension plan and any annuity payments to survivors of spouses that were involved in the plan. This insurance also provides guarantees on disability benefits that were part of the plan.

Exclusions

• Even though the PBGC guarantees several types of benefits, there are a few things that it does not guarantee. For example, any health insurance or welfare benefits that you received for your old pension plan you will not be able to get reimbursed by this insurance. Any vacation pay that you were entitled to or severance pay will not be paid. Any disability or death benefits that would be due from an incident after the plan ended will not be paid either.

Maximum Limit

• If you have a large pension payment from your pension plan, you may not be able to receive the full benefit that you were entitled to. As of 2010, the maximum annual payment that the PBGC can make is $54,000. If you had a pension that was over $54,000, you would receive only the maximum payment regardless of how much you were owed.