Bankruptcy may, in fact, affect your employee benefits. The analysis involves two scenarios: 1) you declaring bankruptcy, and 2) your employer declaring bankruptcy.
Bankruptcy is a many-taloned beast, fashioned from both state and federal law. Not only are there different types of bankruptcy, but each state’s law can treat assets differently, determining which are vulnerable and which aren’t. Consequently, it is difficult to provide definitive answers without knowing an individual’s detailed situation. Nevertheless, some generalizations can be made.
HEATH INSURANCE
Since the category of this Article titles is under Health Insurance, we’ll start there. In a personal bankruptcy, your health insurance will not be affected, regardless of whether it is an employer-sponsored plan or Medicare/Medicaid .
If, however, your employer declares bankruptcy, your employer-sponsored plan may be in trouble. You will need to read your policy closely and talk to a plan administrator. If you are to experience a reduction in benefits, your provider must notify you at least sixty days before those changes go into effect.
If coverage is terminated, you may be protected by federal C.O.B.R.A. law (see related article: http://www.helium.com/tm/238510/cobra-stands-consolidated-omnibus), which extends your health insurance coverage upon termination for up to thirty-six months.
RETIREMENT BENEFITS
In a personal bankruptcy, your pension and your 401(k) plans cannot be touched in bankruptcy as long as they contain an “anti alienation” clause. Most do, but it is worth verifying. If your plan doesn’t have such a clause, state law still may exempt it, but that will depend on the law of each state.
Other retirement benefits, such as IRAs, are likely exempted (placed outside the reach of your creditors entirely or up to a certain dollar value) by your state’s bankruptcy law. Even if it isn’t exempted by state law, federal law now exempts up to $1 million worth of certain retirement benefits.
If your employer declares bankruptcy, your pension is protected by two sources. First, federal law referred to as ERISA requires companies to protect assets to honor pension commitments. Second, the federal government’s Pension Benefit Guaranty Corporation will cover shortfalls where the company cannot pay Traditional Plan benefits. However, 401(k) plans are not similarly insured.
LIFE INSURANCE & OTHER BENEFITS
In a personal bankruptcy, creditors cannot reach your un-matured life insurance benefits. In addition, social security, disability, and veterans benefits are also protected. Since these benefits aren’t contingent upon or assets of your employer, an employer’s bankruptcy will not change their protected status.
Bankruptcy is a stressful event, to say the least. However, some of your most important protections and assets, namely health coverage and retirement benefits, have a strong likelihood of surviving the process.
Note: This article is for illustration purposes only and should not be substituted for specific legal advice. If you have any questions about your legal rights and obligations, you should contact an attorney specializing in this area of law.