Here is a link to the Dept of Labor’s website answering this question….. Fact Sheet: Your Employer's Bankruptcy - How Will It Affect Your Employee Benefits? http://www.dol.gov/ebsa/newsroom/fsbankruptcy.html
This is the section on retirement plans Retirement Plans
Workers in bankruptcy situations face two important issues when it comes to their retirement benefits: access to pension benefits and the continued safety of their pension assets. Generally, your pension assets should not be at risk when a business declares bankruptcy, because ERISA requires that promised pension benefits be adequately funded and that pension monies be kept separate from an employer’s business assets and held in trust or invested in an insurance contract. Thus, if an employer declares bankruptcy, the retirement funds should be secure from the company’s creditors. In addition, plan fiduciaries must comply with the ERISA provisions that prohibit the mismanagement and abuse of plan assets. If contributions to a plan have been withheld from your pay, you may want to confirm that the amounts deducted have been forwarded to the plan’s trust or insurance contract.
In addition, some pension benefits may be insured by the Federal Government. Traditional plans (defined benefit plans) are protected by the Pension Benefit Guaranty Corporation (PBGC), a Federal Government corporation. If a plan is terminated because an employer has financial difficulty and cannot fund the plan, and the plan does not have enough money to pay the promised benefits, the PBGC will assume responsibility for the plan. The PBGC pays benefits after termination up to a certain maximum guaranteed amount. On the other hand, defined contribution plans, such as 401(k) plans, are not insured by the PBGC.
In the event the pension plan is terminated, the plan must vest your accrued benefit 100 percent. This means that the plan owes you all the pension benefits that you have earned so far, even benefits you would have lost if you had voluntarily left your employment. ERISA does not require that pension benefits be paid out before normal retirement age, usually age 65. Your plan may provide for distribution sooner than this. Some plans require participants to reach a certain age before benefits will be distributed, and some require the participant to have been separated from employment for a specified period of time. You should review the summary plan description for the plan rules regarding payment of benefits. Also remember that taking a distribution of pension benefits before retirement may have important tax consequences. You may need to consult with a tax advisor before accepting the distribution.
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The bankruptcy should not result in your account being frozen. However, because bankruptcy can cause a void in the ongoing operating of normal plan functions that require your company and/or its officers to do certain things, I would suggest that if you qualify to take your money out of the plan (like employment termination, pre-termination distribution rights, etc.) that you do so ASAP. You want to do everything you can to not get your 401(k) monies caught up in any complications that may occur. If you do withdraw your account, I suggest that you transfer everything to an IRA so you will not incur any tax costs. Then if you are still working for this company after and if they come out of bankruptcy proceedings, or another company that has a 401(k) plan, you can transfer your IRA money to the plan, if you like and the plan allows it. There should also be no tax on this second transfer if you do everything properly. I wish you much good luck with your situation. Do not allow yourself to become a victim, act now.
De, This is a great question and one I've heard more lately. Retirement plans, like your 401(k), are held in a trust that is seperate from the company assets. Thus, they are not able to be touched by creditors or the company. The only thing that can be done is for you to take the funds out or invest it. If your company is going through a bankruptcy, there is a good chance that the normal processing time for withdrawing from your account could slowdown. Best of luck.
De The comapny is the plan sponsor. Bankruptcy should not freeze your 401k other than as Herbie mentiioned normal plan functions. The plan should have a custodian which safekeeps the plan assets which is seprate from the Company. However, as an option if you can take an in service distribtuion and do a direct rollever to an IRA it would be recommended. Good Luck. Mark Schreiber CPA