An employer (plan sponsor) can file different types of bankruptcies: It can obtain bankruptcy court approval to reduce creditors’ claims and reorganize its business under Chapter 11 or Chapter 13; it can obtain bankruptcy court approval to liquidate the business in a liquidating plan under Chapter 11; it can terminate the business and liquidate its assets under Chapter 7. An employer who files a reorganizational bankruptcy (Chapters 11 or 13): usually continues to operate its business under the Bankruptcy Court’s protection and, with court approval, may be allowed to reorganize its financial affairs; and can decide to either continue or, with court approval, terminate any retirement plans it maintains. After an employer files a liquidation bankruptcy (Chapter 7), the Chapter 7 trustee obtains control over all of the business’s assets and: liquidates these assets to pay creditors; closes the business before or at the end of the bankruptcy proceedings; and terminates the business’s retirement plans. Generally, the law protects participants’ retirement plan assets from the bankrupt employer’s creditors by requiring the assets be: kept separate from the employer’s assets; and held in trust or invested in insurance. If an employer in bankruptcy terminates its defined benefit plan or its defined contribution plan, all participants’ become 100% vested in their accrued benefit. A participant in a bankrupt employer’s retirement plan should immediately contact the plan administrator (listed in the plan documents) to get information on the type of bankruptcy filed by the employer and the status of his or her retirement plan. If the employer in bankruptcy terminates a defined benefit plan, the Pension Benefit Guaranty Corporation may insure some benefits. The PBGC usually pays benefits after termination up to a certain maximum guaranteed amount. Additional resources Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
