401k Plans And Company Bankruptcy  

     There are many companies that go bankrupt and people can see their 401k funds dwindle. Sometimes to oblivion. Even a large corporation like Enron was declared bankrupt and many people just saw their 401k balances disappearing.

     However, there are federal laws that protect your assets in 401k if a company goes bankrupt.

     Practically everyday companies go bankrupt in the US. While these bankruptcies result in layoffs and employees lose their income, there are laws in place which protect these employee’s 401k savings. One thing is for sure that the federal laws protect most your savings in a 401k plan if not all.

      The US has an act known as the Employee Retirement Income Security Act, also known as ERISA. This act requires all the 401k plan assets to be held in a trust account. This is apart from the employer’s asset. Once the employee separates from the company, he cannot access the money without the rules enforced by the trust. In addition, the employer cannot use the money in the trust to fund the company’s operation. This means even creditors cannot lay their hands on this money.

       All the 401k savings in the trust are not property of the estate and cannot be subject to liquidation. Your contributions in a 401k plan prior to bankruptcy of your employer are safe and protected. Even vested employer contributions are also protected by ERISA. In some cases, if the employer lays off large number of employees in a year, the unvested employer contributions may become completely vested. The lay off has to around 20 percent in one year’s time for this to happen.

       However, if your employer has not been depositing his contributions to the trust regularly, you may not get the money that is due to you. Sometimes, employers do not deposit your part of the contribution before filing for bankruptcy. This will also affect the money which is due to you. However, in this case it should affect just one month’s contribution and not more. This is because the Department of Labor stipulates that an employee’s contribution to a 401k retirement plan should be deposited in the trust no later than 15 working days after the contribution was made.

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