401K Rules and Employer Bankruptcy

What are the 401K rules if your employer goes bankrupt?

401K plans are a great place to let your investment funds accrue in preparation for retirement. Many employees have been contributing to their companies 401k plans for many years. But with the recent upheavals in the job market and with hundreds of companies going out of business every month, including many that go into bankruptcy, many workers are wondering what the rules are and if their 401k retirement plans are safe.

If a company is acquired by another one, they usually also assume responsibility for the management of your 401K plan. If a company goes bankrupt, however, fortunately the employee does not lose his money. There is a government law in place to protect their 401K plan. The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for how private companies handle retirement plans such as 401Ks.

ERISA doesn't not demand that an employer have a 401K plan for their employees, it simply demands that those who do have retirement plans meet certain minimum standards.

The law also contains detailed provisions for reporting to the government and disclosure to participants. There also are provisions aimed at assuring that all plan funds are protected and that participants who qualify receive their benefits.  Violation or misuse of any funds in these retirement plan could result in federal charges being levied against the corporate officers.

According to the federal government's department of labor the 401K rules are as follows:

"If an employer declares bankruptcy, it will generally take one of two forms: reorganization under Chapter 11 of the Bankruptcy Code, or liquidation under Chapter 7. A Chapter 11 (reorganization) usually means that the company continues in business under the court's protection while attempting to reorganize its financial affairs. A Chapter 11 bankruptcy may or may not affect your pension or health plan. In some cases, plans continue to exist throughout the reorganization process. In a Chapter 7 bankruptcy, the company liquidates its assets to pay its creditors and ceases to exist. Therefore, it is likely your pension and health plans will be terminated.

When your employer files for bankruptcy you should contact the administrator of each plan or your union representative (if you are represented by a union) to request an explanation of the status of your plan or benefits. The summary plan description will tell how to get in touch with the plan administrator."

Note that if a 401K plan is terminated, the participants in that plan are always 100 percent vested in their own contributions  as well as employer contributed fund. The monies in the plan won't be distributed to the participants, however, until the IRS approves the termination of the plan.

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