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Plant and business closings, downsizing
and reductions in hours affect employees in numerous adverse
ways. Workers lose income, the security of a steady job and,
often, the health and other benefits that go along with
working full time. As a dislocated worker, you may have many
questions, some of them concerning your health and pension
benefits. For instance, Do I have access to my retirement
funds? What happens to my health insurance coverage? Can I
continue health benefits until I get another job?
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You may have rights to certain pension
protections and health benefits even if you lose your job.
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If your company provided a group health insurance
plan, you may be entitled to continued health benefits for a period of
time. When you find a new job, you may have fewer barriers to health
care coverage. And with a change in employment, you should understand
how your pension benefits are affected. Knowing your rights can help
you protect yourself and your family until you are working full time
again.
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This booklet addresses some of the common questions
dislocated workers ask. In addition, there is a brief guide to
additional resources at the back. Together, they can help you in
making critical decisions about continued health care coverage and
about your pension benefits.
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The Employee Benefits Security Administration
(EBSA)
enforces and administers the Employee Retirement Income Security Act
of 1974 (ERISA), the nation's major pension law. This piece of
legislation provides a number of rights and protections for
private-sector pension and health benefit plan participants and their
beneficiaries.
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There have been a number of amendments to
ERISA,
expanding the protections available to pension and health benefit plan
participants and beneficiaries. One important amendment, the
Consolidated Omnibus Budget and Reconciliation Act of 1985 (COBRA),
provides some workers with the right to continue their health benefit
coverage for a limited time after they lose their jobs.
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Another recent amendment to ERISA is the Health
Insurance Portability and Accountability Act of 1996 (HIPAA). This
piece of legislation includes important new protections for millions
of working Americans and their families who have preexisting medical
conditions or might otherwise suffer discrimination in health coverage
based on factors that relate to an individual's health.
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The following questions and answers pertain to
these laws and how they may affect you.
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One of the first questions dislocated workers ask
is:
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What happens to my health insurance?
While dislocated workers may lose health insurance
from their former employer, they may have the right to continue health
coverage under certain conditions. Health continuation rules enacted
under COBRA (the Consolidated Omnibus Budget Reconciliation Act of
1985) apply to dislocated workers and their families as well as
workers who change jobs or workers whose work hours have been reduced,
thus causing them to lose eligibility for health insurance. This
coverage is temporary, however, and the cost is borne by the employee.
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To be eligible for COBRA coverage, you must have
been enrolled in your employer's health plan when you worked and the
health plan must continue to be in effect for active employees. In
addition, you must take steps to enroll for COBRA continuation
benefits.
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Which employers are required to offer COBRA
coverage?
Employers with 20 or more employees are usually
required to offer COBRA coverage and to notify their employees of the
availability of such coverage. COBRA applies to private-sector
employees and to most state and local government workers. In addition,
many states have laws similar to smaller companies. You should check
with your State Insurance Commissioners's Office to see if such
coverage is available in your state.
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What if the company closed or went bankrupt and
there is no health plan?
If there is no longer a health plan, there is no
COBRA coverage available. If, however, there is another plan offered
by the company, you may be covered under that plan. Union members who
are covered by a collective bargaining agreement that provides for a
medical plan also may be entitled to continued coverage.
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How do I find out about COBRA coverage and how
do I elect to take it?
Employers or health plan administrators must
provide an initial general notice if you are entitled to COBRA
benefits. You probably received the initial notice about COBRA
coverage when you were hired.
When you are no longer eligible for health
coverage, your employer has to provide you with a specific notice
regarding your rights to COBRA continuation benefits. Here is the
sequence of events: First, employers must notify their plan
administrators within 30 days after an employee's termination or after
a reduction in hours that causes an employee to lose health benefits.
Next, the plan administrator must provide notice to
individual employees of their right to elect COBRA coverage within 14
days after the administrator has received notice from the employer.
Finally, you must respond to this notice and elect
COBRA coverage by the 60th day after the written notice is sent or the
day health care coverage ceased, whichever is later. Otherwise, you
will lose all rights to COBRA benefits.
Spouses and dependent children covered under your
health plan have an independent right to elect COBRA coverage upon
your termination or reduction in hours. If, for instance, you have a
family member with an illness at the time you are laid off, that
person alone can elect coverage.
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If I elect COBRA, how much do I pay?
When you were an active employee, your employer may
have paid all or part of your group health premiums. Under COBRA, as a
former employee no longer receiving benefits, you will usually pay the
entire premium amount—that is, the premium that you paid as an
active employee plus the amount of the contribution made by your
employer. In addition, there may be a 2 percent administrative fee.
While COBRA rates may seem high, you will be paying
group premium rates, which are usually lower than individual rates.
Since it is likely that there will be a lapse of a
month or more between the date of layoff and the time you make the
COBRA election decision, you may have to pay health premiums
retroactively—from the time of separation from the company. The
first premium, for instance, will cover the entire time since your
last day of employment with your former employer.
You should also be aware that it is your
responsibility to pay for COBRA coverage even if you do not receive a
monthly statement.
Although they are not required to do so, some
employers may subsidize COBRA coverage.
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When does COBRA coverage begin?
Once you elect coverage and pay for it, COBRA
coverage begins on the date that health care coverage ceased. It is,
essentially, retroactive. In addition, the health care coverage you
receive is the same as it is for active employees.
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How long does COBRA coverage last?
Generally, individuals who qualify initially are
covered for a maximum of 18 months, but coverage may end earlier under
certain circumstances. Those circumstances include:
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Premiums are not paid on time
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Your former employer decides to discontinue a
health plan altogether
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You obtain coverage with another employer's
group health plan (There may be some exception if your new
employer's health plan excludes or limits benefits for a
preexisting condition—basically a medical condition present
before you enrolled in the plan. Please see the discussion on
HIPAA that follows.)
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You become entitled to Medicare benefits
Employers may offer longer periods of COBRA
coverage but are only required to do so under special circumstances,
such as disability (yours or a family member's), your death or
divorce, or when your child ceases to meet the definition of a
dependent child under the health plan.
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Who can answer other COBRA questions?
COBRA administration is shared by three federal
agencies. The Department of Labor (DOL) handles questions about
notification rights under COBRA for private-sector employees. The
Department of Health and Human Services (HHS) handles questions
relating to state and local government workers. The Internal Revenue
Service (IRS), Department of the Treasury, has other COBRA
jurisdiction.
More details about COBRA coverage are included in
the booklet Health Benefits under the Consolidated Omnibus Budget
Reconciliation Act. Information on how to obtain a copy and telephone
numbers for the DOL office nearest you are located at the back of this
booklet. You may obtain telephone numbers for the nearest HHS and IRS
offices by calling the Federal Information Center at: 1.800.688.9889.
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HIPAA—the Health Insurance Portability and
Accountability Act of 1996—recently amended the Employee Retirement
Income Security Act to provide new rights and protections for
participants and beneficiaries in group health plans. Understanding
this amendment is important to your decisions about future health
coverage. HIPAA contains protections both for health coverage offered
in connection with employment ("group health plans") and for
individual insurance policies sold by insurance companies
("individual policies").
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If you find a new job that offers health coverage,
or if you are eligible for coverage under a family member's
employment-based plan, HIPAA includes protections for coverage under
group health plans that:
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Limit exclusions for preexisting conditions
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Prohibit discrimination against employees and
dependents based on their health status
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Allow a special opportunity to enroll in a new
plan to individuals in certain circumstances
If you choose to apply for an individual policy for
yourself or your family, HIPAA includes protections for individual
policies that:
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What is a "preexisting" condition?
A "preexisting condition" is a condition
present before your enrollment date in any new group health plan.
Under HIPAA, the only preexisting conditions that
may be excluded under a preexisting condition exclusion are those for
which medical advise, diagnosis, care or treatment was recommended or
received within the 6-month period before your enrollment date. (Your
enrollment date is your first day of coverage, or if there is a
waiting period to get into the plan, the first day of the waiting
period.)
If you had a medical condition in the past, but
have not received any medical advise, diagnosis, care or treatment
within the 6 months prior to your enrollment date in the plan, your
old condition is not a "preexisting condition" to which an
exclusion can be applied. Moreover, under HIPAA, preexisting condition
exclusions cannot be applied to pregnancy, regardless of whether the
woman had previous health coverage.
Finally, a preexisting condition exclusion cannot
be applied to a newborn, adopted child or child placed for adoption as
long as the child enrolls for health coverage with 30 days of the
birth, adoption or placement for adoption and provided that the child
does not incur a subsequent 63-day break in coverage.
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I have a preexisting condition that may be
excluded under HIPAA. How does my new plan determine the length of my
preexisting condition exclusion period?
The maximum length of a preexisting condition
exclusion period is 12 months after your enrollment date (18 months in
the case of a "late enrollee"). A late enrollee is an
individual who enrolls in a plan other than on the earliest date on
which coverage can become effective under the terms of the plan and
other than on a "special enrollment date" (see below).
A plan must reduce an individual's preexisting
condition exclusion period by the number of days of an individual's
"creditable coverage." Most health coverage is creditable
coverage, such as coverage under a group health plan (including COBRA
continuation coverage), HMO, individual insurance policy, Medicaid or
Medicare. However, a plan is not required to take into account any
days of creditable coverage that precede a significant break in
coverage (generally, a break in coverage of 63 days or more).
A plan generally receives information about an
individual's creditable coverage from a certificate furnished by a
prior plan or health insurance issuer (e.g., an insurance company or
HMO). You should receive a certificate of creditable coverage
automatically when you lose coverage under your old plan or when you
become entitled to COBRA continuation coverage and when your COBRA
continuation coverage ceases. You also have a right to receive a
certificate when you request one from your previous plan or issuer
within 24 months of when your coverage ceases (including before your
coverage ceases).
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I received my certificate from my former plan.
What do I do now?
You should:
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Ensure that the information is accurate;
(Contact the plan administrator of your former plan if any
information is wrong.)
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Keep the certificate in case you need it; (You
will need the certificate if you enroll in a new group health plan
that applies a preexisting condition exclusion period or if you
purchase an individual policy from an insurance company.)
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What if I have trouble getting a certificate
from my former employer's group health plan?
Under HIPAA, group health plans and health
insurance issuers are required to provide documentation that certifies
the creditable coverage you have earned. Plans and issuers that fail
or refuse to provide such certificates are subject to penalties under
HIPAA.
However, if you have trouble obtaining a
certificate, your new group health plan is required to accept other
evidence of creditable coverage, if you have it. It is important,
therefore, to keep accurate records (e.g., pay stubs, copies of
premium payments or other evidence of health care coverage) that can
be used to establish periods of creditable coverage in the event a
certification cannot be obtained.
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When I enroll in a new group health plan that
contains a preexisting condition exclusion period, how does
"crediting" for prior coverage work under HIPAA?
Most plans will use what is known as the
"standard method" of crediting coverage. Under this method,
you will receive credit for your previous coverage that occurred
without a break in coverage of 63 days or more. Any coverage you had
prior to a break in coverage of 63 days or more may not be credited
against a preexisting condition period. However, if your health
coverage is offered through an HMO or an insurance policy issued by an
insurance company, you should check with your State Insurance
Commissioner's office to find out if this break in coverage period is
longer in your state.
To illustrate: Suppose an individual had health
insurance coverage for 2 years followed by a break in coverage of 70
days and then resumed coverage for 8 months. That individual would
only receive credit for 8 months of coverage. No credit would be given
for the 2 years of coverage prior to the break in coverage of 70 days.
HIPAA also permits an "alternative
method" for crediting coverage for all employees. Under the
alternative method of calculating creditable coverage, the plan or
issuer separately determines the amount of an individual's creditable
coverage for any of the five following categories of benefits: mental
health, substance abuse treatment, prescription drugs, dental care and
vision care. Your new plan must notify you if it is using the
alternative method for any of these benefits.
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What are my new group health plan's obligations
with respect to "special enrollment opportunities"?
A group health plan is required to allow special
enrollment for certain individuals to enroll in the plan without
having to wait until the plan's next regular enrollment season.
A special enrollment opportunity occurs if an
individual with other health insurance loses that coverage. A special
enrollment opportunity also occurs if a person has (or becomes) a new
dependent through marriage, birth, adoption or placement for adoption.
However, you must notify the plan of your request for special
enrollment within 30 days after losing your other coverage or within
30 days of having (or becoming) a new dependent.
If you enroll as a special enrollee, you may not be
treated as a late enrollee for purposes of any pre- existing condition
exclusion period. Therefore, the maximum preexisting condition
exclusion period that may be applied is 12 months, reduced by your
creditable coverage (rather than 18 months, reduced by creditable
coverage).
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Can I be denied coverage or charged more for
coverage by my new group health plan based on my health status?
No. First, group health plans and health insurance
issuers may not establish rules for eligibility (including continued
eligibility) of any individual to enroll under the terms of the plan
based on "health status-related factors." These factors
include: health status, medical condition (physical or mental), claims
experience, receipt of health care, medical history, genetic
information, evidence of insurability and disability. However, plans
may establish limits or restrictions on benefits or coverage for all
similarly situated individuals.
Second, plans generally may not require an
individual to pay a premium or contribution that is greater than that
for a similarly situated individual based on a health status-related
factor.
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What if I am unable to obtain new group health
plan coverage?
You may be able to purchase an individual insurance
policy. HIPAA guarantees access to individual policies to
"eligible individuals." Eligible individuals are those who:
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Have had coverage for at least 18 months where
the most recent period of coverage was under a group health plan
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Did not have their group coverage terminated
because of fraud or nonpayment of premiums
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Are ineligible for COBRA continuation coverage
or have exhausted their COBRA benefits (or continuation coverage
under a similar state provision)
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Are not eligible for coverage under another
group health plan, Medicare or Medicaid or have any other health
insurance coverage.
The chance to buy an individual policy is the same,
whether you are laid off, fired or quit your job. However, the type of
coverage you are guaranteed may differ across states. Therefore, it is
important to check with your State Insurance Commissioner's Office if
you are interested in obtaining individual insurance coverage.
In addition, individuals in a family whose income
is temporarily reduced (for example, due to loss of a job) may be
eligible for low-cost or no-cost health insurance through public
programs. For example, in many instances, children will be eligible
for low-cost coverage. Eligibility for these programs varies by state
and sometime within a state. You can contact state government
officials to find out if you are eligible.
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The Employee Retirement Income Security Act of
1974, or ERISA, protects the assets of millions of Americans so that
funds placed in retirement plans during their working lives will be
there when they retire.
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ERISA does not require that pension benefits be
disbursed before normal retirement age, usually age 65. By that age an
employee is usually "vested" in a retirement plan—that is,
the employee has earned the years of service credit required to retire
with a pension.
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Dislocated workers face two important issues when
they leave employment:
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Can I get my pension money if I am laid off?
Generally, if you are enrolled in a 401(k), profit
sharing or other type of defined contribution plan (a plan in which
you have an individual account), your plan may provide for a lump sum
distribution of your retirement money when you leave the company.
However, if you are in a defined benefit plan (a
plan in which you receive a fixed, pre- established benefit) your
benefits begin at retirement age. These types of plans are less likely
to contain a provision that enables you to withdraw money early.
Whether you have a defined contribution or a
defined benefit plan, the form of your pension distribution (lump sum,
annuity, etc.) and the date your pension money will be available to
you depend upon the provisions contained in your plan documents. Some
plans do not permit distribution until you reach a specified age.
Other plans do not permit distribution until you have been separated
from employment for a certain period of time. In addition, some plans
process distributions throughout the year and others only process them
once a year. You should contact your pension plan administrator
regarding the rules that govern the distribution of your pension
money.
One of the most important documents you should have
is the summary plan description (SPD). It outlines what your benefits
are and how they are calculated. A copy of the SPD is available from
your employer or pension plan administrator.
In addition to the SPD, your employer also may give
you—or you may request—an individual benefit statement showing the
value of your pension benefits— the amount you have actually earned
to date and your vesting status. These documents contain important
information for you, whether you withdraw your money now or later.
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Is my plan required to give me a lump-sum
distribution?
ERISA does not require pension and profit-sharing
plans to provide for lump-sum distributions. Lump-sum distributions
are possible only if the plan specifically provides for them and only
if you meet the plan's eligibility requirements.
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If I withdraw retirement money, are there
potential adverse effects?
Yes. Receiving a lump sum or other distribution
from your pension plan may affect your ability to receive unemployment
compensation. You should check with your state unemployment office.
In addition, receiving money from your pension plan
may result in additional income tax. You can defer these taxes,
however, if you keep the money in your plan or if you "roll
over" the money into a qualified pension plan or Individual
Retirement Account (IRA). There are provisions in the Internal Revenue
Code that allow these rollovers.
Generally, your plan is required to withhold 20
percent of an eligible rollover distribution unless you elect to have
the distribution paid directly to an eligible retirement plan,
including an IRA. This is known as a "direct rollover." If
there is no direct rollover, you will have to make up the 20 percent
withholding to avoid tax consequences on the full rollover amount. The
IRS does not require 20 percent withholding of an eligible rollover
distribution that, when added to other rollover distributions made to
you during the year, is less than $200.
Under IRS rules, and in order to avoid certain tax
consequences, you have 60 days to roll over the distribution you
received to another qualified plan or IRA if you wish to avoid the tax
consequences.
If you have a choice between leaving the money in
your current pension plan or depositing it in an IRA, you should
carefully evaluate the investments available through each option.
Withdrawing money from your retirement plan also
affects the amount of money you will accumulate over time. The graph
below shows the consequences of withdrawing money from your pension
plan and not depositing it in another qualified plan within the
required time limit.
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As the graph shows, your pension keeps the full
amount it earns through investments because its earnings are not fully
taxed (until you receive a distribution). As a result, pension
accounts can grow faster than comparable taxable accounts (see graph).
Let's say, for instance, that you have $10,000 in a pension account or
IRA, and it earns an average return on investment of 10 percent. In 20
years it will grow, with compounding, to $67,300. If you withdraw this
amount after you reach age 59½ (the age at which you can withdraw
money without a 10 percent penalty) and pay 28 percent income tax on
your withdrawal, you will keep $48,400.
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On the other hand, if you close your pension
account before age 59½, taxes will claim a portion of the funds you
receive and will reduce your return every year thereafter. As a
result, the value of your account after 20 years will be approximately
$24,900, assuming the same rate of return and tax bracket. As shown in
the graph, the tax consequences of early withdrawal will cost you 45
percent of your account balance at retirement.
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Before you withdraw retirement funds, you may want
to talk to your employer, bank, union or a financial advisor for
practical advice about the long-term and the tax consequences.
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If I am laid off, are my retirement funds safe?
Generally, your pension funds should not be at risk
when a plant or business closes. Employers must comply with federal
laws when establishing and running pension plans, and the consequences
of not prudently managing pension plan assets are serious.
In addition, your pension benefits may be protected
by the federal government. Traditional plans (defined benefit plans)
are insured by the Pension Benefit Guaranty Corporation (PBGC), a
federal government corporation. If 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 as trustee of the plan. The PBGC pays benefits up to a
certain maximum guaranteed amount.
Defined contribution plans, on the other hand, are
not insured by the PBGC.
To help employees monitor their retirement plans
and thus ensure retirement security, EBSA has issued a list of ten
warning signs that may indicate your pension plan has financial
problems. They are included in the publication Protect Your Pension,
listed at the end of this booklet.
If, for any reason, you suspect your pension
benefits are not safe or are not prudently invested, you should pursue
the issue with the EBSA regional office nearest you. The address and
telephone number of each regional office are listed at the back of
this booklet.
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What if my company goes out of business and the
pension plan terminates?
In a defined contribution plan, the plan
administrator generally gathers certain pension plan and tax-related
information and submits it to the IRS. This process may delay plan
termination and subsequent payment of any benefits. You should contact
your pension plan administrator for information on status and length
of time before you receive your money.
In a defined benefit plan, the plan administrator
generally files certain documents with the IRS and the PBGC. Once PBGC
approves the termination, benefits are generally distributed in a lump
sum or as an annuity within 1 year of termination.
Regardless of the type of benefit plan, you should
know the name of the plan administrator. This information is contained
in the latest copy of your summary plan description. If you can't find
the name of your plan administrator, you may wish to contact your
company's personnel department, your union representative (if there is
a union) or the IRS or PBGC (in the case of most defined benefits
plans).
If you do decide to contact one of these agencies,
you may need to know your employer's identification number, or EIN, a
9-digit number used for tax purposes. The EIN can be found on last
year's wage tax form (Form W-2). A EBSA regional office may be able to
help you obtain this information.
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What if the company declared bankruptcy?
If an employer declares bankruptcy, there are a
number of choices as to what form the bankruptcy takes. A Chapter 11
(reorganization) bankruptcy may not have any effect on your pension
plan and the plan may continue to exist. A Chapter 7 (final)
bankruptcy, where the employer's company ceases to exist, is a more
complicated matter.
Because each bankruptcy is unique, you should
contact your pension plan administrator, your union representative or
the bankruptcy trustee and request an explanation of the status of
your pension plan.
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Know in advance the plan rules that govern the way
your pension assets and health care benefits are treated if you are
laid off. The following documents contain valuable information about
your health care and pension plans and should be helpful to you as a
dislocated worker. You should be able to obtain most of them from your
plan administrator, union representative or human resource
coordinator.
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Summary plan description - A brief description
of your pension or health plan
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Summary annual report - A summary of the plan's
annual finances; the summary may contain names and addresses you
may need to know
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Enrollment forms listing you and/or your family
members as participants in a plan
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Earnings and leave statements
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A certificate of creditable coverage (furnished
by your former employer) - Informs your new employer that you had
health coverage
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Statements showing how much money is in your
pension account or the value of your pension benefit
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You should save these documents. In addition, you
should save any documents, such as memos or letters from your company,
union or bank, that relate to your pension or health plans. They may
prove valuable in protecting your pension and health benefit rights.
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The Employee Benefits Security Administration
offers more information on ERISA, COBRA and HIPAA. The following
booklets may be
particularly useful:
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For copies of the above publications, or for
specific questions pertaining to your rights to pension or health
benefits under COBRA, HIPAA or ERISA, call the EBSA Toll-Free Employee
& Employer Hotline: 1.866.444.EBSA (3272).
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For more information about the impact of HIPAA on
COBRA continuation coverage, see IRS
Notice 98-12.
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