You're so busy right now, dealing with the divorce, the kids, the holidays -- you've barely had time to catch the news. And, you've had enough bad news in your personal life lately, thank you very much, so the last thing you want to hear about is more bad financial news. The announcement of American Airlines' filing for bankruptcy protection may have barely hit your radar screen.
But all retirees, workers, and people going through a divorce should pay attention to that bit of news, because it could affect your divorce and your retirement. How? When a company declares bankruptcy, its pension plan is often terminated and taken over by a government entity called the Pension Benefit Guaranty Corporation ("PBGC"). The PBGC is a federal corporation created to insure qualified pension plan benefits (learn more at www.pbgc.gov). It's like the more-familiar FDIC, which insures bank accounts up to a certain amount; it's a security net for pension plans. PBGC does not take taxpayer money. It is funded by the pension plans themselves.
When pension plans are terminated, the PBGC takes over as Plan Administrator and handles things like calculating and paying benefits and reviewing and administering QDROs (which are court orders providing retirement payments to non-employees such as former spouses and children). The PBGC pays benefits up to certain legal limits, so employees usually receive most of their accumulated qualified pension benefits. The maximum pension benefit guaranteed by the PBGC is set by law and adjusted each year.
The economic downturn has caused so many retirement plan terminations that PBGC says it already has a $26 billion deficit. Right now, the PBGC is worried about whether it will have to take over American Airlines' massive pension plans. It does not have enough money to cover all of American Airlines' retirement obligations to current and former employees. PBGC released a statement after American filed for bankruptcy, stating that the airline has a shortfall of about $10 billion for its retirement obligations, and that PBGC would do everything possible to preserve American Airlines' retirement plans rather than have to take them over. PBGC will be pushing American to keep its retirement plans afloat, to avoid having to come up with new funds to cover American's workers if the plans are terminated. If they are not successful, then there will be difficult choices to make about how to proceed -- possibly by raising the premiums paid to PBGC, or a (presumably unpopular) bailout by taxpayers.
If the PBGC is forced to take over American Airlines' retirement plans, a huge number of people -- not just employees and retirees of American Airlines (and their families and former spouses) -- could be affected. According to PBGC, 44 million Americans participate in qualified pension plans protected by PBGC. This does not include the number of former spouses and dependents of those workers and retirees, all of whom would stand to lose benefits if PBGC becomes unable to make its payments.
If you are going through a divorce and either you or your spouse has a qualified pension plan, whether you are still working or retired, you need to address the retirement benefits in your divorce document. Make sure that you understand the specifics of the retirement plan, and be careful to include language that will protect your share of the benefit in the event that the plan is terminated or benefits are reduced. A divorce agreement or QDRO can include a provision that says the benefits will be reduced proportionally between you and your ex if there is ever a reduction or termination in the future. One bit of good news is that bankruptcy generally does not affect 401(k) plans in the same way as traditional pension plans, so the PBGC is not involved. When an employer files for bankruptcy, 401(k) funds are usually just distributed to employees from their individual accounts, and these funds can be rolled into other retirement accounts such as IRAs.
There is one important point too often missed in divorce cases, with disastrous consequences. Non-qualified benefits are not guaranteed by the PBGC, so employees will likely lose all of their accumulated non-qualified retirement funds if their employer files for bankruptcy. If you are in the midst of a divorce, make sure you find out whether any of the retirement benefits you are dividing are non-qualified. Your divorce document should spell out what will happen if the non-qualified benefits do not get paid.
It's hard to keep your eye on the ball when there are so many other balls to follow nowadays. Whether you're going through a divorce, tough financial times, or both, this issue could have an enormous impact on your financial future. Add "retirement" to the list of things that must be investigated and addressed in your divorce. If you are a worker or retiree, keep an eye out for news about PBGC and your employer's financial health. There have of course been times when it would have been impossible to imagine the bankruptcy of the big airlines -- but as the last few years have demonstrated, anything is possible, and it pays to be prepared.