If Your Company Declares Bankruptcy, What Happens to Your 401(k) Money?

By Clifton Linton
Writer, mPower

In this article: Your Most Recent Contributions May Be Lost What About the Employer Match? Bankruptcy Isn't Necessarily the End of the 401(k) Plan Where to Go For Help

It was a short but important question that arrived in my e-mail inbox: "What happens to a vested 401(k) plan if a company files for bankruptcy? In particular, what happens to employees' contributions?"

The simple answer is that the plan is protected under law. Creditors can't attach 401(k) plans because the money in them isn't considered an asset of the employer. The retirement plan money is yours.

"What you have is protected under law. You wouldn't lose anything" if your company went bankrupt, said Stuart Lewis, an attorney with the law firm of Silverstein and Mullens, a division of Buchanan and Ingersoll PC.

Still, there are a few things you should know if your employer goes belly up.

Your Most Recent Contributions May Be Lost

If your employer declares bankruptcy before depositing employee contributions into the 401(k) plan, creditors may be able to get that money. The reason is that the money hasn't been placed within the protective envelope of a qualified retirement plan.

The law requires employers to submit employee contributions to the 401(k) plan within 15 working days after the end of the month in which the contributions were deducted from the employee's paycheck. If your employer follows this rule, the most you would lose would be about 45 days worth of contributions.

However, some small employers in dire financial straits may violate the law and hold the money for six months or longer before depositing it, says Ted Benna, the creator of the first 401(k) plan. In this case, losses by the participant would be larger.

"What you have is protected under law. You wouldn't lose anything." - Stuart Lewis, attorney with Silverstein and Mullens, a division of Buchanan and Ingersoll PC

Money safely in a plan is administered by a trustee who makes sure that assets are held separately from the employer's assets, said Laura Stern, director of institutional investments with TwentyTwenty Advisors Inc., a 401(k) consulting management firm.

What About the Employer Match?

Any vested employer contributions are yours. If your company usually deposits its matching contributions as frequently as you make your contributions, the money is probably protected. However, if the match is made less frequently, for example only at year-end , it might be in jeopardy.

If the employer match is considered a discretionary contribution, "creditors may be able to block employees' access to that unmade contribution," Lewis said.

If the employer match is considered obligatory, then employees might be able to file a claim against the assets of the company. Their claim would have to be prioritized with other creditors'.

Most commonly, employer matches are discretionary. To find out what type of employer match you receive, check the retirement plan document, said Lewis.

To find out what happens to your 401(k) plan when your company merges with another firm, or is acquired, click here.

Bankruptcy Isn't Necessarily the End of the 401(k) Plan

Just because your employer declares bankruptcy doesn't mean it will close its doors. Indeed, your plan might not be affected at all.

If your employer files for bankruptcy under a Chapter 11 reorganization, that means it expects to continue to operate and it's likely the plan will continue to operate as well. In that case, you will likely still make contributions. Your employer may or may not continue making matching contributions.

It is possible, Lewis said, for a judge supervising a bankruptcy reorganization to discontinue the plan. In that case, as when a company is liquidated, the retirement plan will be terminated and you will receive your contributions, vested employer match and profits. (If your plan is terminated, all employer matching contributions become fully vested.)

You can roll your account into an IRA to keep the tax advantage, or take cash. If you take cash, you will owe tax on the entire amount plus a 10% early withdrawal penalty if you are under 59 1/2.

It can take anywhere from a few weeks to seven months to get your money if the plan is terminated, said John Fletcher, a retirement expert with Century Business Systems.

Where to Go For Help

If your employer declares bankruptcy there are a few folks you should contact to find out the status of your retirement money.

The first is the plan administrator. That person can request information from the company's legal counsel, says Linda Kravchick, director of operations with Ceridian Retirement Plan Services, a retirement-plan record-keeping firm.

Another person who may know the status of your plan is the plan trustee.

Further, you can go to the Internal Revenue Service and request the form 5500 on your employer, Stern advises. That form should list all the service providers used by your plan sponsor, so you can follow up with them if you have questions about your account.

If you suspect the plan is being mishandled, you can contact the U.S. Department of Labor at 800.998.7542.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

If Your Company Declares Bankruptcy, What Happens to Your 401(k) Money?

By Clifton Linton
Writer, mPower

In this article: Your Most Recent Contributions May Be Lost What About the Employer Match? Bankruptcy Isn't Necessarily the End of the 401(k) Plan Where to Go For Help

It was a short but important question that arrived in my e-mail inbox: "What happens to a vested 401(k) plan if a company files for bankruptcy? In particular, what happens to employees' contributions?"

The simple answer is that the plan is protected under law. Creditors can't attach 401(k) plans because the money in them isn't considered an asset of the employer. The retirement plan money is yours.

"What you have is protected under law. You wouldn't lose anything" if your company went bankrupt, said Stuart Lewis, an attorney with the law firm of Silverstein and Mullens, a division of Buchanan and Ingersoll PC.

Still, there are a few things you should know if your employer goes belly up.

Your Most Recent Contributions May Be Lost

If your employer declares bankruptcy before depositing employee contributions into the 401(k) plan, creditors may be able to get that money. The reason is that the money hasn't been placed within the protective envelope of a qualified retirement plan.

The law requires employers to submit employee contributions to the 401(k) plan within 15 working days after the end of the month in which the contributions were deducted from the employee's paycheck. If your employer follows this rule, the most you would lose would be about 45 days worth of contributions.

However, some small employers in dire financial straits may violate the law and hold the money for six months or longer before depositing it, says Ted Benna, the creator of the first 401(k) plan. In this case, losses by the participant would be larger.

"What you have is protected under law. You wouldn't lose anything." - Stuart Lewis, attorney with Silverstein and Mullens, a division of Buchanan and Ingersoll PC

Money safely in a plan is administered by a trustee who makes sure that assets are held separately from the employer's assets, said Laura Stern, director of institutional investments with TwentyTwenty Advisors Inc., a 401(k) consulting management firm.

What About the Employer Match?

Any vested employer contributions are yours. If your company usually deposits its matching contributions as frequently as you make your contributions, the money is probably protected. However, if the match is made less frequently, for example only at year-end , it might be in jeopardy.

If the employer match is considered a discretionary contribution, "creditors may be able to block employees' access to that unmade contribution," Lewis said.

If the employer match is considered obligatory, then employees might be able to file a claim against the assets of the company. Their claim would have to be prioritized with other creditors'.

Most commonly, employer matches are discretionary. To find out what type of employer match you receive, check the retirement plan document, said Lewis.

To find out what happens to your 401(k) plan when your company merges with another firm, or is acquired, click here.

Bankruptcy Isn't Necessarily the End of the 401(k) Plan

Just because your employer declares bankruptcy doesn't mean it will close its doors. Indeed, your plan might not be affected at all.

If your employer files for bankruptcy under a Chapter 11 reorganization, that means it expects to continue to operate and it's likely the plan will continue to operate as well. In that case, you will likely still make contributions. Your employer may or may not continue making matching contributions.

It is possible, Lewis said, for a judge supervising a bankruptcy reorganization to discontinue the plan. In that case, as when a company is liquidated, the retirement plan will be terminated and you will receive your contributions, vested employer match and profits. (If your plan is terminated, all employer matching contributions become fully vested.)

You can roll your account into an IRA to keep the tax advantage, or take cash. If you take cash, you will owe tax on the entire amount plus a 10% early withdrawal penalty if you are under 59 1/2.

It can take anywhere from a few weeks to seven months to get your money if the plan is terminated, said John Fletcher, a retirement expert with Century Business Systems.

Where to Go For Help

If your employer declares bankruptcy there are a few folks you should contact to find out the status of your retirement money.

The first is the plan administrator. That person can request information from the company's legal counsel, says Linda Kravchick, director of operations with Ceridian Retirement Plan Services, a retirement-plan record-keeping firm.

Another person who may know the status of your plan is the plan trustee.

Further, you can go to the Internal Revenue Service and request the form 5500 on your employer, Stern advises. That form should list all the service providers used by your plan sponsor, so you can follow up with them if you have questions about your account.

If you suspect the plan is being mishandled, you can contact the U.S. Department of Labor at 800.998.7542.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.