401(k) Assets Stuck in Limbo: Plan Sponsor Bankruptcy Explained

Lawmakers have asked the Department of Labor to ensure Steward Health Care System LLC preserves benefits for nearly 30,000 workers and retirees during its bankruptcy, highlighting the sometimes precarious state of retirement assets after a company files.

Procedures are in place to ensure that a bankrupt employer does not separate plan participants and beneficiaries from the savings they have accumulated over the years, and the Department of Labor can take special steps to entrust 401 assets (k) to their rightful owners. ‘accounts after terminating a plan.

The two most common types of bankruptcy proceedings plan sponsors undergo, Chapter 7 and Chapter 11, can impact the fate of the 401(k) itself. During a Chapter 11 restructuring, some plan sponsors choose to continue to administer a plan, modifying matching policies or other factors in order to maintain the viability of benefits for the financially distressed company.

Steward, Yellow Logistics Inc., Rite Aid Corp. and Bed Bath & Beyond Inc. are among recent major bankruptcies that have focused attention on the 401(k) issue and the fate of more traditional pensions during this difficult process. Plan sponsors must balance the difficult tasks of winding up large plans and distributing their assets to the right parties, while managing their own bankruptcy proceedings.

1. What happens to 401(k) assets in bankruptcy?

The assets of tax-qualified retirement plans that operate under the Employee Retirement Income Security Act of 1974 are not subject to creditor claims in bankruptcy, and these funds are set aside in a trust to that they cannot be used for unrelated expenses.

While defined benefit pension plans and defined contribution plans like 401(k)s are protected by federal agencies in bankruptcy, only pensions are insured by the Pension Benefit Guaranty Corporation. The federal pension insurer seeks to recover all funds from participants in multi-employer and single-employer plans if the affected companies go bankrupt.

A plan sponsor may choose to continue or terminate a plan during the restructuring process when it is subject to Chapter 11. If the bankrupt plan sponsor chooses to continue the 401(k) plan, it may elect to suspend employer matching or profit sharing contributions. The amount withheld by the employer from each paycheck to contribute on behalf of its employees is excluded from the bankruptcy estate.

Termination of a 401(k) requires the plan sponsor to terminate employee elective deferrals and match all employer contributions, communicate the details of the termination to participants, file a final Form 5500 disclosing the data of the plan to the DOL, then distributes all assets to savers. .

2. Which agencies can protect workers’ retirement savings?

The federal government plays a key role in ensuring that retirement savers regain their hard-earned assets in the event of a plan sponsor’s bankruptcy. The Ministry of Labor regularly intervenes to conduct bankruptcy investigations to mitigate the risk of plan losses.

The agency’s Distressed Plan Sponsors initiative aims to protect participant benefits jeopardized by an employer’s financial problems, which include bankruptcy. In some cases, the agency will conduct investigations to mitigate the plan’s risk of losses, as it did in a 2016 order requiring land improvement company William Bowman and Associates Inc. to continue restoring assets owed to plan participants.

When a company files for bankruptcy, the Employee Benefits Security Administration takes immediate action to verify whether any plan contributions are unpaid to the plan trust, providing assistance in filing proofs of claim to protect participants and beneficiaries.

As part of its regular involvement in projects abandoned following bankruptcies, the agency seeks to ensure that money is allocated quickly. The EBSA also attempts to identify the assets of the responsible trustees and assess whether legal action should be taken against them to ensure that the plans are fully realized and benefits are guaranteed.

Lawmakers called on the DOL on June 17 to ensure that Steward employees receive their health care and retirement benefits through the failed health care system, including Senators Edward J. Markey (D-Mass.) and Bernie Sanders (I-Vt.), as well as Reps. Ayanna Pressley (D-Mass.) and Seth Moulton (D-Mass.) among those expressing concerns.

“The Department of Labor is an advocate for workers and I have asked them to focus their attention and resources to ensure that union workers and retirees receive the wages, health care and retirement benefits to which they are entitled,” Markey said in an emailed statement.

The IRS and Treasury Department require plan sponsors to amend their plan to comply with changes in the law before winding it up, providing optional approval for a plan to terminate in qualified status at the help of determination letters.

3. What is the role of a bankruptcy trustee?

The Department of Labor finalized a rule in May, expected to take effect next July, allowing bankruptcy trustees to distribute abandoned 401(k) assets to participants and beneficiaries. Under the new interim rule and the amended prohibited transaction exemption, court-approved debt agents can terminate a plan that has been left behind.

Retirement savers can access assets after their employer declares bankruptcy through trustees, who will be able to take custody of benefits, trace missing participants and make transfers. The rule clarifies that fiduciaries have fiduciary duties, whereas fiduciaries handling plan bankruptcies in the past technically did not have this legal distinction.

The rule extends ERISA protections to plans being wound up under Chapter 7, which were not covered by the existing 2006 rule. The latest iteration of the rule was first proposed in 2012, then shelved under the Trump administration before Biden’s DOL revisited it.

The amended exemption allows a custodian of assets known as a “qualified termination administrator” to pay and receive fees that would otherwise be prohibited by ERISA, a change that responds to comments on the proposal calling for the agency to require trustees to appoint an eligible representative in certain circumstances. Banks, insurance companies, or other financial institutions often serve as QTAs.

The EBSA also amended the rule to clarify that a QTA is only permitted to deposit the assets of a deceased participant into a bank account or state unclaimed property account after conducting a search reasonable of the beneficiary.

4. How do workers of bankrupt companies get their assets back?

Plan participants and beneficiaries who do not receive timely communication from their employer or 401(k) recordkeeper regarding the fate of their retirement assets after bankruptcy have options.

The DOL provides a toll-free number that participants can call to express concerns about retirement plan liquidation, with benefits advisors available to answer questions and refer cases to agency investigators.

In cases where the agency is faced with a plan for which no claim has been filed, EBSA can file its own claim or take legal action to recover money from participants and beneficiaries.

Retirement savers can also call the plan’s accountant directly to ask questions about the location of their 401(k) assets. Participants who are more passive in pursuing their money may find that their account is still in the plan until a third party intervenes.

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