How does bankruptcy impact 401K Plans?

Submitted by Steve Hagedorn on Sun, 2020-05-17 16:59

I was looking for some information on how an employee sponsored 401K plan would be impacted by the company going out of business or restructuring? Do individuals who “own” these plans have rights? Can these retirement plans be frozen or worse taken by the distressed company?

Is it a good idea to rollover a previous employers 401K plan to my present 401K plan? This new employer is now struggling to manage the challenges that are ahead for the company (retail sector).

Thank for any information you can share.



Submitted by Alan - IRA critic on Sun, 2020-05-17 17:23

  • I think you are referrring to employer sponsored plans. These are covered by the ERISA anti-alienation provisions and each employee’s account is kept entirely separate from employer assets. While in a crisis a plan can temporarily freeze distributions, the balance is otherwise protected. In other words, if you in the JC Penney 401k plan your assets are safe (other than investment losses) despite Penney just filing for BK. Maybe there would be a temporary distribution freeze. However, their DB pension (if any) might have to tap PBGC insurance.
  • Many company matching programs are already being suspended, but if you choose to rollover a former 401k plan to an IRA, then you have to concerned with your OWN exposure to creditors. IRA protection is a function of your state law, and most states provide good creditor protection for the most part.
  • If a former  401k is rolled into the present plan, generally this rollover is maintained as a sub account within the plan and is not subject to distribution restrictions. Nonetheless, if the new plan is in the highly distressed retail sector, if your state provides good IRA protection, you may want to roll the former plan to a rollover IRA.
  • Creditor protection is a complex subject, so take the above as general comments only.

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