In a Damaged Economy, Can I Lose My 401(k) if My Company Files Bankruptcy?

For quite some time now, the state of the economy has been a cause for concern on a variety of fronts, but one of the biggest concerns voiced was for the future of many individual’s 401(k) plans. After all, the vitality of these funds depends heavily upon the company’s performance that it is tied to, as well as the individuals association with that company—with so many being laid off, how could concern not flow freely?


Photo by Tax Credits on Flickr

One of the best cures for concern, fear, and every emotion of its kind, though, is knowledge. The best thing that you can do to protect yourself, as well as your 401(k), is to be prepared and to know your options.

In order to assist in this endeavor, below is a list of commonly asked questions about this concern for you to consider, with answers you can add to your knowledge-base. If you want to find out more about how you may be affected, you can check out the Suncorp superannuation calculator.

Q: What happens to my 401(k) if my employer goes bankrupt?
The answer to this question largely depends upon what kind of bankruptcy your employer has filed; it will either be a Chapter 11 or a Chapter 7 bankruptcy. Both will render different results.

Q: What happens as a result of a Chapter 11 bankruptcy?
When this bankruptcy is filed, your employer intends to restructure all of their assets in order to overcome their financial depression. During this restructuring, 401(k) plans may continue on; however, if part of the restructuring is to cut back on benefits, you may lose any matching contributions the company may have made if you’re outside of your company’s designated vesting period.

Q: What happens as a result of a Chapter 7 bankruptcy?
When this bankruptcy is filed, you employer intends to liquidate; when this happens, your 401(k) plan has a high probability of being terminated.

Q: Is there any kind of protection for my 401(k), should a Chapter 7 occur?
Yes; under the Employee Retirement Income Security Act (ERISA) of 1974, the funds held within your 401(k) account must be held separate from company assets and must be protected from creditors; typically, they’re held within a trust or insurance account for safekeeping.

It’s important to keep in mind, however, that any payroll deductions your employer hasn’t yet sent over to the 401(k) will not be recovered.

Q: How often does my employer transfer deductions to my 401(k)?
Your employer is required to transfer all payroll deductions into their individual 401(k) accounts no later than 15 business days past the end of the month within which they were drawn.

Matching contributions that your employer may have been making sometimes occur less frequently (i.e. quarterly, semi-annually, or annually) and therefore might not make the transfer before the bankruptcy occurs.

It’s a good idea to regularly check your 401(k) account statements to monitor this activity, but if your 401(k) comes up a bit short due to bankruptcy, you’ll probably find that the deductions from your most recent paycheck never made it through.

Q: What happens if my 401(k) funds are distributed to me before I reach the age of 59.5 due to company bankruptcy? Am I required to pay taxes on the funds in the account?
If you decide to keep the funds, yes, you will have to pay the same taxes and penalties that you would have paid had you withdrawn your 401(k) before the designated retirement age. You can avoid this, however, by simply rolling the funds from the account over into a new account with a new employer, continuing your 401(k) plan with little, to no, financial interruption.

How Much Should I Save For Retirement?

You don’t need millions of dollars to retire early, but what you do need is a plan and a good portion of money saved to continue living the same lifestyle that you are used to, and also to bridge the gap between when you choose to retire and the age at which you can claim retirement benefits from the government.

RetirementLaneYou can estimate the amount that you need to save for your retirement by calculating your actual disposable income. To do that, start with your nominal income – your complete before tax income – salary and otherwise. From here deduct what you pay in taxes and mortgage if you are making payments. Subtract your  retirement contributions, your savings for your kids’ education, and any job related expenses. This will leave you with your real disposable income – this is the amount of money you should have as a target income for your retirement.

At 65, government benefits will replace some of this disposable income, but if you want to retire before 65 then you will have to rely on your savings for income between when you retire and 65 years of age.