What Happens to Your Benefits After Bankruptcy

Marlene Skulnik worked on Wall Street for 25 years, most recently for Lehman Brothers Holdings Inc. After the investment bank filed for bankruptcy last week, the retired corporate-bond trader had trouble getting a straight answer on whether her pension benefits were safe.

"I would like to have a confirmation that I'm not going to be a housekeeper in a motel in my 70s," says the 57-year-old Ms. Skulnik, who began her career as a secretary in 1975.

As Ms. Skulnik and thousands of other Lehman employees and retirees discovered, it can be difficult getting specific answers to questions about the fate of key corporate benefit plans -- such as traditional pensions, 401(k)s and health insurance -- in the first days after a company goes bust. Even top executives struggle to see where the dust settles. As the financial crisis threatens to consume more companies, it's an increasing concern.

Ms. Skulnik says she was eventually assured by the pension plan's administrator, Fidelity Investments, that her benefits should be safe. Indeed, retirement benefits such as pensions and 401(k) plans are generally protected under federal law in the event a company declares bankruptcy.

It's a far different story for health benefits. Whether your coverage will survive depends in part on whether the company liquidates -- a so-called Chapter 7 bankruptcy -- or continues operating under Chapter 11 reorganization.

Here's what to consider if your company is facing the possibility of bankruptcy:

Retirement plans. The Pension Benefit Guaranty Corp. -- a federal agency created under the Employment Retirement Income Security Act, or Erisa -- guarantees your pension payments, but only up to a maximum amount, which means you might have to take a cut. For pension plans canceled in 2008, the maximum monthly guaranteed payment for a 65-year-old retiree receiving regular payments with no survivor benefits is $4,312.50. The PBGC doesn't insure assets in 401(k) plans. But Erisa requires pension and 401(k) accounts to be adequately funded and kept separate from the company's business assets.

While retirement-plan assets generally won't be swallowed up when a company fails, you could still face losses. If too much of your nest egg is invested in company stock, its value will plunge along with the company's shares ahead of a bankruptcy filing.

Health-care plans. If your company files for Chapter 7 bankruptcy, your health coverage likely will disappear, leaving you few options to explore besides getting on a spouse's plan or paying for expensive individual coverage.

Under Chapter 11 restructuring, your health coverage could stay unchanged as the company reorganizes. Companies in this situation, in fact, will often continue offering benefits to forestall a mass exodus of employees. When Delta Air Lines Inc. filed for Chapter 11 protection in 2005, for example, it continued providing health-care coverage and even vacation days without interruption.

If you employer's health plan continues, but you ultimately lose your job, you could be eligible for continued coverage under the Consolidated Omnibus Budget Reconciliation Act, or Cobra. Under this law, you can buy coverage for up to 18 months if you've been laid off, assuming your company has more than 20 employees.

The catch: You have to pay the entire premium, making the coverage far more expensive. According to a Kaiser Family Foundation study, former employees last year paid an average of $373 a month for individual coverage and $1,009 a month for family coverage, plus a 2% administration fee.

Associated Press/Bebeto Matthews

If a company eliminates your health-care plan, for any reason, all bets could be off -- including Cobra coverage. "Part of the reason for reorganization [is] precisely to allow the cancellation of these types of obligations," says Phillip Phan, a management professor at Johns Hopkins University's Carey Business School.

What to do. While labor laws govern employee benefits, it remains incumbent on workers to arm themselves with information about their health and retirement plans when a company fails, experts say. "I think the most important thing is to make inquiries," says Mark Poerio, cochair of the global practice group for employee benefits at law firm Paul, Hastings, Janofsky & Walker LLP. Federal law "requires honest responses of employers. It punishes misrepresentations."

If your company files for bankruptcy, the U.S. Department of Labor suggests asking human-resources or other management officials these questions: Will your retirement and health-care plans continue or be terminated? Who will be the plans' administrators during and after bankruptcy, and, in the case of a retirement plan, who will be the trustee in charge? Will Cobra coverage be offered to those who lose their jobs? And if a health plan is canceled, how will outstanding claims be paid?

In order to protect yourself, the Labor Department also suggests asking for a "summary plan description" of your retirement and health-care plans; statements that establish employment dates, compensation and contributions to your plans; and a certificate of creditable coverage that states your past health-care coverage with your employer. The information in these documents can educate you on the particulars of your plans, so you know what to expect if they're terminated.

If you're unable to obtain these documents -- or are concerned about suspicious activity related to contributions or investments -- you can contact the nearest office of the Employee Benefits Security Administration, the Labor Department agency that enforces Erisa rules (www.dol.gov/ebsa).

If you suspect your company is in danger of failing, you should start preparing for it. Joanna Wilson, a former financial analyst at Delphi Corp., a Troy, Mich.-based auto-parts supplier, did just that before her employer declared bankruptcy in 2005.

Delphi, suffering amid a brutal downturn in the domestic auto industry, had begun cutting workers and postponing raises. They also started increasing health-care premiums. "The writing was on the wall," says Ms. Wilson. "People were jumping ship left and right."

Ms. Wilson decided to switch to the health plan at her husband's law firm. That plan was more expensive and wasn't as generous as Delphi's in its heyday, she says. But the move safeguarded her care and, as Delphi kept raising premiums, the couple decided it made financial sense. She also consulted a financial adviser about rolling over her 401(k) to an individual retirement account, which she did when she left the company soon after it filed for Chapter 11.