What happens if the company you worked for goes “belly up’?  Can the company you worked for terminate your plan?  What can a Boomer plan on?

photo credit: patrick h. lauke

Employers can end a pension plan through a process called” Plan Termination”.  There are two ways an employer can terminate a pension plan.  The employer can end the plan in a “standard termination” but only after showing the Pension Benefit Guaranty Corporation (here after referred to as “PBGC “) that the plan has enough money to pay all benefits owed to the participants.  The plan must either purchase an annuity from an insurance company (which will provide you with lifetime benefits when you retire) or if your plan allows, issue a one lump sum payment that covers your entire benefit.

What if the plan is not fully funded?

If the plan is not fully funded, the employer may apply for a distress termination if the employer is in financial distress.  To do so however, the employer must prove to a bankruptcy court or to the PBGC that the employer cannot remain in business unless the plan is terminated.  If the application is granted, the PBGC will take over the plan and pay the plan benefits, up to the legal limits, using plan assets and PBGC guarantee funds.  (Under certain circumstances, the PBGC may take action on its own to end a pension plan without an application if it determines that there is not enough money to pay benefits currently due.)

If a single employer pension plan terminates without enough money to pay all the benefits, the PBGC will take over the plan and pay benefits through its insurance program.  Most participants and beneficiaries receive all of the pension benefits they would have received under the plan, but some people may lose certain benefits that are not guaranteed.   

Guaranty “Limits” of the Pension Benefit Guaranty Corporation

The PBGC pays pension benefits up to certain maximum limits.  The maximum guaranteed benefit is $4,500 per month, or $54,000 per year, payable in the form of straight life annuity, for a 65 year old person in a plan that terminates in 2010.  The maximum benefit may be reduced for an individual who is younger than 65.  The maximum benefit will also be reduced when a benefit is provided to a survivor of a plan participant.

PBGC Maximum Monthly Guarantees (see: PBGC Tables)

What is Guaranteed by the PBGC?

The PBGC does guarantees “basic benefits” earned before a plan is teminated, which includes:

• Pension benefits at normal retirement age
• Most early retirement benefits
• Annuity benefits for survivors of plan participants
• Disability benefits for a disability that occurred before the date the plan terminated

What is not Guaranteed?

The PBGC does not guarantee certain types of benefits.

The PBGC does not guarantee:

• Benefits for for which you do not have a vested right when the plan terminates, usually because you have not worked enough years with the company.
• Benefits for which you have not met all age, service, or other requirements at the time the plan terminates.
• Benefit increases and new benefits that have been in place for less than one year.
• Benefits in place for less than five years are only partly guaranteed.
• Early retirement benefits that are greater than payments at normal retirement age.
• Health and welfare benefits.
• Vacation pay.
• Severance benefits.
• Lump sum death benefits for a death that occurs after the date the plan ends.
• Disability benefits for a disability that occurs after the plan’s termination date.
• Lump sum payments exceeding $5,000 are generally not paid.

Even if certain benefits are not guaranteed, participants and beneficiaries still may receive some of those benefits from the PBGC depending on how much money the terminated plan has and how much the PBGC collects from the employer.

In Summary

In summary, your pension benefits are guaranteed to legal limits by the PBGC, other benefits not considered part of the actual pension plan such as health care insurance, life insurance, vacation benefits, and severance payments are not considered part of a pension plan and may not necessarily be covered.  So, …When they say nothing in life is guaranteed! … They are wrong!  PB.

If your company goes bankrupt what happens to your Pension?  Will you be left out in the cold?  Will the money you have been counting on for your retirement be gone?  Will you be forced into continuing to work, or even worse, be forced into returning to work after you have already retired?

Safeguards Against Losing Your Pension Plan

Fortunately, it is not as bad as most people think!  There are safeguards in the United States to prevent you from losing your pension plan.  In the United States every defined-benefit retirement plan is insured, at least to a point.  Most will receive all or at least most of their company pension even if your company goes bankrupt.  However, in some cases,  it may not be every penny you expected.   

What Happens When a Company Goes Bankrupt?

When a company goes bankrupt they have two choices.  They can reorganize and try to stay in business by reducing costs and attracting new investors, or they can liquidate.  The pension plan is usually terminated in reorganization and always terminated in liquidation.  So, then what happens?  A federal insurance agency called the Pension Benefit Guaranty Corporation (pbgc.gov), takes over the pension payments.  Only employees with the largest pensions actually take a hit.  The Pension Benefit Guaranty Corporation maximum annual payment, which rises with inflation, is $54,000 this year for workers who retire at age 65.  As with any insurer, the PBGC has some restrictions.  For example, it prorates recent pension increases.  However, in all, 84 percent of retirees get their full pension even after bankruptcy.

A Few Rare Cases Under Reorganization

In a few rare cases of a company bankruptcy reorganization, the employer maintains the its pension plan.  That normally only happens for one of three reasons.

1. The benefit is low
2. Employee turnover is high
3. The pension plan is new

Avoiding Bankruptcy is Better For The Company.

In most cases, however, it is always better for the company to avoid bankruptcy altogether.  In December of last year, Congress gave some help in this direction by relaxing the 2006 Pension Protection Act‘s strict rules governing pension funding.  As counter intuitive as it may seem, this is one move that endangered workers should embrace.  As a result of this move, according to Dallas Salisbury, president of the non-partisan Employee Benefit Research Institute, ” Given the economic downturn, employees are better off than if the company was forced to make a large pension contribution”.  “It’s better to stay in business than make a pension contribution”.

How Does This Affect Me?

I am actually receiving a pension from a large company that is not bankrupt.  I have been asked by many of my friends what will happen if the company I retired from goes under during these difficult times.  Thankfully, as a result of the above protections, I can answer them …  as far as my pension goes … not much!

Protection For Health Care Benefits Are Not The Same!

I wish I could say the same for the medical benefits.  They are not nearly as well protected.   In my last few years of employment, the cost of  health care benefits for retirees, which at one time were an excellent value were increased to the point where it was not affordable to maintain.  I was forced to purchase a private plan to hang in there until age 65 when Medicare kicks in!  It is my single largest monthly expense.  It’s not often you wish you were older but when it comes to health care insurance I can’t wait until I’m 65.  Papa B.