Employer Bankruptcy & 401(k)

Your 401k assets are not subject to liquidation if your employer files for bankruptcy.

Federal law protects employee 401(k) assets from the creditors of bankrupt employers. All the vested money in the account is yours. If your company has recently gone bankrupt, however, your 401(k) may be vulnerable on a couple of fronts.

Significance

A 401(k) is a class of retirement asset known as a defined contribution plan, as opposed to a defined benefit plan. Federal insurer the Pension Benefit Guaranty Corporation covers defined benefit plans, usually pensions. Defined contribution plans, such as 401(k)s, are not covered.

Warning

Because 401(k)s are not insured, your company's 401(k) custodian could charge you termination fees associated with shutting down the plan. If your 401(k) is invested in company stock, the stock may become worthless if your employer goes bankrupt.

Prevention/Solution

If you suspect that your company may go bankrupt, check to see if your plan allows you to roll over your 401(k) while you are still employed. If so, you can roll it into an individual retirement account (IRA).

If your company is already bankrupt, you can still roll over the account. In addition to the rollover amount, the Internal Revenue Service may allow you, as of 2010, to contribute an extra $3,000 to an IRA, for a total of $8,000. Although less than the 2010 contribution cap for 401(k)s ($16,500, for those 49 and younger), it can help you increase your retirement savings in an otherwise difficult year.

References

• Internal Revenue Servie: Publication 590: Catch-up Contributions in Certain Employer Bankruptcies
• Charles Schwab: What happens to my 401(k) if my company goes bankrupt?
• Bankruptcy Law Network: Employer's Bankruptcy Could Hurt Your 401(k) Plan
• 401k Focus: How much money am I allowed to contribute each year?

Resources

• U.S. Department of Labor: Your Employer's Bankruptcy - How Will It Affect Your Employee Benefits?