Your Employer is Going Bankrupt - What Happens to Your Pension Benefits?
by: Daniel Lamaute
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What happens to your retirement benefits when your employer faced with financial distress and bankruptcy decides to terminate their pension plan? To gauge the potential risk to you of a plan termination you first need to know what kind of plan you have with your company.
Pension plans come in two basic types 1) defined benefit plan, where the company promises to contribute enough to the plan now and in the future to meet the pension benefits it promised to all of its workers, and 2) defined contribution or 401(k) type
plans where contributions are generally placed into a separate account for you as you earn them, thus reducing your risk as it relates to a company failure.
The Pension Benefit Guaranty Corporation (PBGC), a government entity modeled after the Federal Deposit Insurance Company, has the primary responsibility for protecting the more than 44 million workers who participate in defined benefit plans. The PBGC operates an insurance program designed to maintain payment on workers pension plans when their company, usually after bankruptcy, terminates their pension plan and there is not enough money to pay the promised pension benefits.
Even with the PBGC insurance, however, you may still be at risk of losing a substantial part of your pension fund benefits when a plan is terminated. That’s because the law limits the maximum in benefits that the PBGC insurance can pay to any one person. For pension plans ending in 2004, the maximum guaranteed amount is set at $19,973 per year for those who retire at 55 and tops out at $44,386 per year for workers who retire at age 65. This guarantee amount is even lower if your pension includes benefits for a survivor or other beneficiary.
Employees working for companies in financial distress (i.e., manufacturers, major airlines), should discuss with their financial adviser the idea of taking early retirement and requesting a lump sum payment as a means to protect their accumulated pension benefits, especially if the present value of the total PBGC payments they would receive is much less than the lump sum they could get now.
You generally can put all or part of your lump sum into a traditional IRA or other qualified plan. If you have your own business you can do "tax-free rollover," to a Self-Employed 401(k) that allows you to continue to contribute to your plan while keeping the flexibility of taking a loan from your 401(k) plan.
About the Author
Daniel Lamaute, of Lamaute Capital, Inc. specializes in setting up retirement plans for small business owners. http://www.InvestSafe.com
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