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In bankruptcies, where do benefits go?

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Tess Vigeland: So COBRA is an option for employees who’ve been laid off. But what happens when the company goes out of business?

Corporate bankruptcy rumors and announcements are now part of daily life. This week’s rumors involved possible Chapter 11 filings at the Seattle Times and auto parts maker Visteon. Actual announcements came from a Texas ethanol manufacturer, a seafood processor in Alaska and a Chicago clothier, among others.

Kimberly Lankford of Kiplinger’s Personal Finance magazine joins us to talk about what happens to employee benefits during a bankruptcy. Welcome back to the program.

Kimberly Lankford: Thank you for having me.

Vigeland: We’ve just heard this story about the Gardas from Sally Herships, and I wonder if there’s kind of anything that you wanted to expand on in terms of letting folks know what the option are once they lose a job. There’s COBRA, but that’s not all, right?

Lankford: Well, the choices do get difficult if you do have a pre-existing condition, but if you are healthy, many times you can get a much better deal buying a private insurance policy on your own, especially if you buy a high-deductable plan with a health-savings account, you get tax benefits. But if you do have a pre-existing condition, your choices are limited.

Vigeland: What we’re talking about here is if someone loses their job, but what happens if your company literally goes out of business? There are so many that are declaring bankruptcy now. Are you eligible for COBRA even if a company goes bankrupt?

Lankford: No. If your company actually stops doing business and discontinues its health insurance plan, then there is no COBRA. You do get a few other options though. You may be able to sign up for your spouse’s plan even though it’s not open enrollment season or you may have additional protections like continuation policies and other conversion policies that you may be eligable depending on your state.

Vigeland: Are there certain programs that you should keep an eye out for? I know it varies from state to state, but are there, say, childrens insurance programs that you should make sure you’re looking for as you’re doing this research?

Lankford: Well, that is a great idea. A lot of families who aren’t qualified for Medicaid because they earned too much or had too much in assets lose their job and may still be qualified to have their children on the state’s health insurance program. So, it’s definitely something to check out. A website that I really like called, it spells out all of these things in your state. It talks about the high-risk pools, childrens heath insurance rules, Medicaid rules, all of these options for people who may have pre-existing conditions or may have lost their job.

Vigeland: OK. And we’ll put links to that site on our website, which is And what about pensions and other retirement benefits? If your company goes under, what protections are there for that money that either you have set aside or has been set aside for you?

Lankford: Well, there is the Pension Benefit Guaranty Corporation and they are really coming into play when a lot of companies are going bankrupt. If the money that the company had set aside and reserved for pension is not enough to be able to fulfill its obligations, then they end up paying a certain amount in benefits. There’s a limited amount, so you may not be able to get all of your benefits, but the government agency is there to make sure that you still get some pension payouts even if the reserves that you set aside can’t afford to cover it.

Vigeland: Well, how is that determined? Whether companies either get to dip into the PBGC or aren’t allowed to?

Lankford: Well, so much of it depends on what the bankruptcy court decides. If the bankruptcy court decides that the company cannot pay its obligation, or if it shuts down entirely, then the pension plan will be terminated and the PBGC can help pay the benefits.

Vigeland: And what about if you have a 401(k)?

Lankford: 401(k) is actually held in a separate trust. There’s a lot of protections there and employers cannot touch that money. If they become bankrupt, if they need the money, they can’t touch it. It’s your money.

Vigeland: Kimberly Lankford is with Kiplinger’s Personal Finance magazine. Thanks so much for coming in and helping us out today.

Lankford: It’s my pleasure.

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