Safeguards vary for job benefits

PERSONAL FINANCE

December 21, 2008|By EILEEN AMBROSE | EILEEN AMBROSE,eileen.ambrose@baltsun.com

With your paycheck, health insurance and retirement tied to your employer, you might wonder about the safety of these benefits if the company hits hard times.

Is your 401(k) secure if your employer has a cash flow problem? Can the company's creditors make a claim on your pension fund? What happens to health insurance if the company goes out of business?

Employees have some protections, even if their employer files for bankruptcy court protection, as The Baltimore Sun's parent recently did.

Here's a rundown:

401(k)

Rest assured, the 401(k) money is held within a trust, and your employer can't dip into it. And an employer's creditors also can't stake a claim against the 401(k), or a traditional pension, either.

But there is some room for hanky-panky.

Your employer is supposed to turn your contributions over to the trust as quickly as administratively possible, and anything longer than seven business days is usually frowned upon by the Department of Labor, says Rick Meigs, president of 401(k)helpcenter.com.

When cash-strapped employers don't forward workers' contributions to the plan, it is often because they are using the money to run the business or make payroll, Meigs says.

The Labor Department will go after employers for doing this. This month, for instance, the agency sued the trustees of Maryland Sound & Image in Baltimore for failing to deposit workers' contributions to the plan from 2003 through most of 2006.

Company owner and trustee Walter Hill says he failed to forward $20,000 in contributions for one quarter in 2006 as the business struggled. He used the cash for paychecks and health insurance for workers.

"I am going to pay it," he says, adding he is working on a settlement with the Labor Department.

Check your quarterly statement or account online to make sure your contribution is deposited in the plan. If it isn't, contact regulators at 866-444-3272.

Bradford Campbell, assistant secretary of labor for employee benefits, says that such cases go up in hard economic times, but they are still uncommon. Out of nearly a half-million 401(k)s, his office investigated about 1,000 such incidents last year and recovered $25 million.

Rules on when an employer makes its matching contribution are different. The match often goes into the plan along with workers' contributions.

But companies can make their match in a lump sum after filing taxes for the year, says Robert Christenson, a benefits lawyer in Atlanta. With filing extensions, 2008 matching contributions can be made well into 2009, he says.

On top of that, employer contributions are often discretionary, allowing the company to suspend the match when times are tough, Christenson says.

But the biggest risk in times likes these is your 401(k) investments. And there's no protection against losses when markets fall.

Traditional pension

"It's probably the safest of all," Christenson says. "Unlike a 401(k), the investment risk is on the company."

But pension promises can be broken.

While any pension benefits you've accrued to date are protected, an employer can always change the plan formula going forward, says Barbara Schlaff, a Baltimore benefits lawyer.

Many employers also have frozen costly pension plans, Schlaff says. Some exclude new hires from a plan, while others won't allow workers to accrue additional benefits after the freeze sets in, she says.

A company can terminate a pension. If it does, the employer must fully fund the plan. The Pension Benefit Guaranty Corp. will take over a plan if an employer is in deep financial trouble, usually bankruptcy, and can't afford to fully fund a terminated plan.

For plans terminated next year, the PBGC maximum annual benefit will be $54,000 - up $2,250 from this year - for those retiring at 65. Your benefit will be less if you retire earlier.

The PBGC benefit is enough to cover 84 percent of beneficiaries, with high-salaried workers such as airline pilots usually taking a cut.

Insurance

This benefit is less secure.

Companies usually reserve the right to terminate or reduce health benefits at any time.

The Consolidated Omnibus Budget Reconciliation Act generally allows you to continue coverage under an employer's plan if you're laid off, although you'll pay the full cost. But if your employer goes out of business, there is no COBRA coverage.

If a defunct employer had an affiliated company with insurance, you can get COBRA coverage through that, Christenson says. Or, if that's not an option, you could join a spouse's group plan without having to wait for open enrollment, says Amy Danise, editor of Insure.com.

Life insurance also is at risk. "If you're laid off, leaving a job, quit or terminated, group life doesn't go with you," Danise says.

Wages and severance

Sometimes severance is not an ironclad guarantee but merely a company practice or a perk that employers can change at will.

If your employer files for bankruptcy court protection owing you money, though, you become a priority creditor, says Gregory Cross, a Baltimore bankruptcy lawyer. You can file a claim, with priority given to the first $10,950 in unpaid wages, vacation and severance.

If your benefits are part of a union contract, your employer can't eliminate them without negotiating with the union. That's true if the employer is in bankruptcy, too. However, if talking doesn't work and the company can show the court that the union won't accept a reasonable proposal, the contract can be rejected, Cross says.

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