Fact Sheet

U.S. Department of Labor 

Employee Benefits Security Administration 

YOUR EMPLOYER’S BANKRUPTCY 

HOW WILL IT AFFECT YOUR EMPLOYEE BENEFITS?

The Department of Labor’s Employee Benefits Security Administration (EBSA), administers the 

Employee Retirement Income Security Act of 1974 (ERISA), which governs retirement plans (including 

profit sharing and 401(k) plans) and welfare plans (including health, disability, and life insurance 

plans). ERISA also includes the health coverage continuation and accessibility provisions of the 

Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Insurance Portability and 

Accountability Act (HIPAA). This information sheet focuses on bankruptcy’s effect on pension plans 

and group health plans.

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. Questions that you may want to ask include: 

 Will the plan continue or will it be terminated? 

 Who will be acting as plan administrator of the plans during and after the 

bankruptcy, and who will be the trustee in charge of the pension plan? 

 If the pension plan is to be terminated, how will accrued benefits be paid? 

 Will COBRA continuation coverage be offered to terminated employees? 

 If the health plan is to be terminated, how will outstanding health claims be paid, 

and when will certificates of creditable coverage (showing, among other things, the 

dates of enrollment in your employer’s health plan) be issued? 
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KNOW YOUR PLAN:

Know the plan rules that govern the way your pension assets and health benefits are treated 

when the plan is terminated. The following documents contain valuable information about 

your health and pension plans and should be helpful to you. You should be able to obtain most 

of them from your plan administrator, employer, or union representative. 

 Summary plan description - A description of your pension and health plans. 

 Summary annual report (not available for some plans) - An annual summary of the 

plan’s finances that may contain names and addresses you may need to know. 

 Earnings and leave statements - These are your pay stubs and may help you 

establish your employment dates, compensation, and contributions to a plan. 

 Certificate of creditable coverage (available upon request even if you still have 

health coverage and provided automatically when your health coverage ceases) - A 

certificate of creditable coverage is a statement of your past health care coverage 

with your employer. 

 Individual benefit statements showing how much money is in your retirement 

account (for individual account plans) or the value of your pension benefit (for 

defined benefit plans). 

RETIREMENT PLANS:

Workers in bankruptcy situations face two important issues when it comes to their retirement 

benefits: access to pension benefits and the continued safety of their pension assets. 

Generally, your pension assets should not be at risk when a business declares bankruptcy, 

because ERISA requires that promised pension benefits be adequately funded and that pension 

monies be kept separate from an employer’s business assets and held in trust or invested in an 

insurance contract. Thus, if an employer declares bankruptcy, the retirement funds should be 

secure from the company’s creditors. In addition, plan fiduciaries must comply with the 

ERISA provisions that prohibit the mismanagement and abuse of plan assets. If contributions 

to a plan have been withheld from your pay, you may want to confirm that the amounts 

deducted have been forwarded to the plan’s trust or insurance contract. 

In addition, some pension benefits may be insured by the Federal Government. Traditional 

plans (defined benefit plans) are protected by the Pension Benefit Guaranty Corporation 

(PBGC), a Federal Government corporation. If a plan is terminated because an employer has 

financial difficulty and cannot fund the plan, and the plan does not have enough money to pay 

the promised benefits, the PBGC will assume responsibility for the plan. The PBGC pays 

benefits after termination up to a certain maximum guaranteed amount. On the other hand, 

defined contribution plans, such as 401(k) plans, are not insured by the PBGC. 

In the event the pension plan is terminated, the plan must vest your accrued benefit 100 

percent. This means that the plan owes you all the pension benefits that you have earned so far, 

even benefits you would have lost if you had voluntarily left your employment. ERISA does 

not require that pension benefits be paid out before normal retirement age, usually age 65. 

Your plan may provide for distribution sooner than this. Some plans require participants to 
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reach a certain age before benefits will be distributed, and some require the participant to have 

been separated from employment for a specified period of time. You should review the 

summary plan description for the plan rules regarding payment of benefits. Also remember 

that taking a distribution of pension benefits before retirement may have important tax 

consequences. You may need to consult with a tax advisor before accepting the distribution. 

 

HEALTH PLANS:

Your group health plan must notify you within 60 days of any reduction in benefits. If a 

reorganizing employer maintained several health plans and discontinues most of its plans, you 

may be eligible to continue coverage in its remaining plan. If you are covered under your 

employer’s health plan and you lose your job, have your hours reduced, or get laid off and lose 

coverage as a result, you and your dependents may qualify for COBRA continuation coverage. 

COBRA provides a right to purchase extended health coverage under your employer’s plan. 

You and your dependents may also have a special enrollment right in a spouse’s group health 

plan. However, you and your dependents must request enrollment within 30 days of losing 

your coverage. If you elect COBRA coverage instead of special enrollment in a spouse’s plan, 

you must exhaust COBRA before you may be eligible for another special enrollment 

opportunity. 

If, however, your employer discontinues all its health plans, COBRA continuation coverage 

will not be available. You will have to seek other coverage. Other coverage may be available 

by converting your employer’s group health coverage to an individual policy. As mentioned 

above, you may also have rights to special enrollment in a spouse’s employer-based health 

plan, or by being an "eligible individual" who is guaranteed access to individual insurance. 

The opportunity to buy an individual insurance policy is the same whether the individual is laid 

off, is fired, or quits his or her job. 

Special bankruptcy rules may apply if you are receiving health benefits as a retiree or if your 

health benefits are the subject of a collective bargaining agreement. 

Finally, if you have unpaid health claims and your plan sponsor has declared bankruptcy, you 

may want to consider filing a proof of claim with the bankruptcy court. 

WHERE TO GO FOR HELP:

You should contact the EBSA regional office nearest you if: 

 You are unable to obtain information or documents about your benefits or related to 

your pension or health plan; 

 You suspect contributions deducted from your pay check have not been deposited 

to the plan, your pension benefits are not safe, or the assets are not prudently 

invested; 

 You need information and assistance with unpaid health claims or in obtaining a 

certificate of creditable coverage. 
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Contact EBSA electronically at www.askebsa.dol.gov or call the EBSA toll-free Hotline at 1-

866-444-EBSA (3272) to speak to a Benefits Advisor if you have questions about your options 

during a bankruptcy. For more information about rights to coverage, visit our Web site at

www.dol.gov/ebsa. 

If your health plan coverage ends, you should contact your State department of insurance to 

inquire about your eligibility for an individual policy under HIPAA.

If your retirement plan is a defined benefit pension plan, all or a portion of the benefits may be 

insured by the Pension Benefit Guaranty Corporation (PBGC). For further information contact 

the: 

Pension Benefit Guaranty Corporation 

Processing and Technical Assistance Branch 

1200 K Street, N.W. 

Washington, D.C. 20005 

1-800-400-7242 

* This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, 

Washington, DC 20210. It will be made available in alternate formats upon request: Voice phone: (202) 693-8664; TTY: 

1-202-501-3911. In addition, the information in this fact sheet constitutes a small entity compliance guide for purposes of the 

Small Business Regulatory Enforcement Fairness Act of 1996. 

Reprinted December 2008