Lawmakers have asked the Labor Department to ensure Steward Health Care System LLC preserves benefits for nearly 30,000 workers plus retirees during its bankruptcy, highlighting the sometimes precarious state of retirement assets after a company files.
Procedures are in place to make sure that an employer going bankrupt doesn’t separate plan participants and beneficiaries from the savings they’ve accrued over the years, and the Labor Department can take special steps to shepherd 401(k) assets into their rightful owners’ accounts after a plan is terminated.
The two most common types of bankruptcy proceedings that plan sponsors undergo, Chapter 7 and Chapter 11, may impact the fate of the 401(k) itself. In a restructuring under Chapter 11, some plan sponsors opt to continue administering a plan, changing match policies or other factors to keep the benefit viable for the company undergoing financial trouble.
Steward, Yellow Logistics Inc., Rite Aid Corp., and Bed Bath & Beyond Inc. are among the recent major bankruptcies to draw attention to the issue of 401(k) and more traditional pensions’ fates during this challenging process. Plan sponsors must balance the difficult tasks of winding down sizeable plans and distributing their assets to the correct parties while handling their own bankruptcy proceedings.
1. What happens to 401(k) assets in a bankruptcy?
Assets in tax-qualified retirement plans that operate under the Employee Retirement Income Security Act of 1974 aren’t subject to creditors’ claims in bankruptcy, and those funds are set aside in a trust so they cannot be used for unrelated expenses.
While both defined benefit pension plans and defined contribution plans like 401(k)s are protected by federal agencies in a bankruptcy, only pensions are insured by the Pension Benefit Guaranty Corporation. The federal pension insurer seeks to fully recover funds for participants in both multi-employer and single-employer plans if the companies involved go bankrupt.
A plan sponsor may choose to either continue or terminate a plan during the restructuring process when undergoing Chapter 11. If the bankrupt plan sponsor opts to keep the 401(k) plan going, they can decide 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.
Terminating a 401(k) requires the plan sponsor to halt employees’ elective deferrals and vest all employer contributions, communicate the details of the termination to participants, file a final Form 5500 disclosing plan data to the DOL, and then distribute all assets to savers.
2. Which agencies can protect workers’ retirement savings?
The federal government plays a key role in assuring that retirement savers are reunited with their hard-earned assets in the event of a plan sponsor’s bankruptcy. The Labor Department routinely steps in to conduct investigations into bankruptcies to mitigate the risk of plan losses.
The agency’s Distressed Plan Sponsors initiative seeks to protect participant benefits put at risk by an employer’s financial problems, which includes bankruptcy. In some cases, the agency will conduct investigations to mitigate the risk of plan losses, as it did in a 2016 order requiring land improvement company William Bowman and Associates Inc. to continue to restore assets owed to plan participants.
When a company declares bankruptcy, the Employee Benefits Security Administration takes immediate action to ascertain whether there are plan contributions unpaid to the plan’s trust, providing assistance in filing proofs of claim to protect participants and beneficiaries.
As part of its routine involvement with abandoned plans following bankruptcies, the agency seeks to guarantee that money gets allocated swiftly. EBSA also attempts to identify assets of the responsible fiduciaries and evaluate whether a lawsuit should be filed against them to ensure that plans are made whole and benefits are secured.
Lawmakers called upon the DOL June 17 to ensure that Steward employees receive their health-care and retirement benefits through the health system’s bankruptcy, including Sens. 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 voicing concerns.
“The Department of Labor is a champion for workers, and I asked them to turn attention and resources toward ensuring that Steward workers and retirees receive the wages and 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 law before winding it down, offering optional approval for a plan to terminate with qualified status using determination letters.
3. What is the role of a bankruptcy trustee?
The Labor Department finalized a rule in May, which is set to go into effect this July, allowing bankruptcy trustees to distribute abandoned 401(k) assets to participants and beneficiaries. Under the new interim rule and amended prohibited transaction exemption, court-approved debt officers can terminate a plan that has been left behind.
Retirement savers can access the assets after their employer files for bankruptcy through trustees, who will be able to take custody of the benefits, search for missing participants, and complete rollovers. The rule clarifies that trustees have fiduciary obligations, whereas trustees handling plan bankruptcies in the past haven’t technically had this legal distinction.
The rule extends ERISA protections to include plans undergoing Chapter 7 liquidation, which weren’t covered under the existing 2006 rule. The newest iteration of the rule was first proposed in 2012, then shelved during the Trump administration before Biden’s DOL revisited it.
The amended exemption allows an asset custodian 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 asking the agency to require trustees to appoint an eligible designee in certain circumstances. Banks, insurance companies, or other financial institutions often serve as QTAs.
EBSA also tweaked the rule to clarify that a QTA is only allowed to deposit a deceased participant’s assets into a bank account or state unclaimed property account after conducting a reasonable search for the beneficiary.
4. How are workers at bankrupt companies reunited with their assets?
Plan participants and beneficiaries who don’t receive prompt communication from their employer or 401(k) recordkeeper about the fate of their retirement assets after bankruptcy have options.
The DOL provides a toll-free number that participants can call to voice concerns about a retirement plan liquidation, with benefits advisers available to answer queries and refer cases to investigators at the agency.
In instances where the agency encounters a plan where claims haven’t been filed, EBSA can file its own claim or bring a lawsuit to recover money for participants and beneficiaries.
Retirement savers can also call the plan’s recordkeeper directly with questions as to the whereabouts of their 401(k) assets. Participants who are more passive about tracking down their money may find that their account is still sitting in the plan until a third party steps in.
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