J.J. Conway
(313) 961-6525
J.J. Conway
(313) 961-6525

Are Employee Benefits Protected if Your Employer Goes Belly Up?

Employee benefits and ERISA attorney J.J. Conway discusses the impact of corporate bankruptcy on retirement and group health plans and offers employees key takeaways

Media Contact: Barbara M. Fornasiero, EAFocus Communications; barbara@eafocus.com; 248.260.8466

Royal Oak, Mich.—September 25, 2023—Inflation, a tight labor market, and ongoing supply chain issues have been identified as potential factors contributing to a significant uptick in corporate bankruptcies filed thus far in 2023. Now, concerns about a prolonged strike by the UAW affecting Tier 2 automotive suppliers can be added to the list.  National employee benefits and ERISA litigation attorney John Joseph (J.J.) Conway, founder of J.J. Conway Law, suspects there have been no shortage of workers trying to navigate their companies’ closures or reorganizations and determine what impact bankruptcy may have on their benefits as a result.

“How the company chooses to file bankruptcy—either Chapter 7 or Chapter 11—will dictate what is salvageable,” Conway points out. “In a Chapter 7 bankruptcy, the company is liquidating assets to pay creditors, and essentially closes down, whereas in Chapter 11, the company continues, while trying to reorganize its finances to stay in business. Each will play out differently for employees, but fortunately ERISA offers protections.”

The Employee Retirement Income Security Act of 1974—or ERISA—governs retirement plans, including pensions, profit-sharing, and 401(k) plans, in addition to welfare plans such as health, disability, and life insurance plans. ERISA also encompasses the continuation of health care coverage under COBRA and HIPAA.

How should workers proceed under bankruptcy to ensure not all is lost? Conway summarizes some key points for employees:

  • Ask plan administrators or union representatives whether the benefit plans will continue or will be terminated, who the acting plan administrator will be, who will be the trustee in charge of retirement plans, if COBRA coverage will be offered to terminated employees, and if the health plan is terminated, how will outstanding health claims be paid.
  • If the bankrupt company terminates its pension plan—defined benefit plan or its defined contribution plan—all participants become 100% vested in their accrued benefits.
  • If the employer terminates a defined benefit plan because the company cannot fund the plan or pay out promised benefits, the Pension Benefit Guaranty Corporation (PBGC) insures some (but not all) benefits, usually paying benefits after termination up to a certain maximum guaranteed amount.
  • Although defined contribution plans, such as 401(k) plans, are not insured by the PBGC, employers cannot touch that money to pay creditors. In a Chapter 11 reorganization, companies may decide to end or continue their plans; if choosing to continue them, however, employers have the right to stop providing any future contributions or matching funds.
  • Group health plans must notify employees within 60 days of any reduction in benefits. If a reorganizing employer discontinues most plans, employees may be eligible to continue coverage in its remaining plan.
  • If employees are covered under the employer’s health plan but subsequently lose their job, have hours reduced, or get laid off and lose coverage due to the bankruptcy, COBRA provides a right to purchase extended health coverage under the employer’s plan. 
  • COBRA continuation coverage may not be available if the company discontinues all its health plans. Employees and their dependents will have to seek other coverage such as Health Insurance Marketplace or special enrollment in a spouse’s group health plan if available.
  • Health benefits for retirees or under collective bargaining agreements may be protected under special bankruptcy rules. 
  • If there are unpaid health claims and the plan sponsor has declared bankruptcy as well, consider filing a proof of claim with the bankruptcy court.

    “The key for employees is to become well-versed in the plan rules that govern their retirement and health benefits and know in advance what happens to those benefits if they are terminated,” Conway said. “That includes the Summary Plan Description which outlines the rights of participants and beneficiaries; the Summary Annual Report if available, which often contains important contact information; earnings and leave statements like pay stubs, and finally, individual benefits statements, showing the amount of money or value in retirement or pension funds. In the event of a bankruptcy or reorganization, this documentation will be invaluable,” he said.

    About J.J. Conway Law

    J.J. Conway Law, an employee benefits litigation and ERISA firm founded by John Joseph (J.J.) Conway in 1999, represents those seeking full access to the employee benefits they earned and are legally entitled to. The firm has been involved with nationally significant employee benefit, disability and pension cases, including class action lawsuits for such landmark decisions as requiring Michigan private insurers to cover autism health treatments for children through age 18 and protecting the pension rights of City of Detroit employees, police and firefighters as well as Wayne County employees by holding their trustees accountable for investment decisions. The firm’s motto, Conquer Tomorrow®, is dedicated to making the future easier for their clients across the United States.  Learn more on the firm’s website.