What Happens to Employee Insurance Benefits When Bankruptcy Occurs?

In any economy, good or bad, businesses of all sizes have the potential to fail. What happens to the employer-sponsored insurance coverage and benefits you have when your company files for bankruptcy?

Read on to find out.

Employer-Based Insurance

An employer-based insurance plan is an agreement between your employer and an insurance company to offer coverage to the entire workforce as a group.

Employees can purchase coverage through the group plan by completing the necessary paperwork. Insurance premiums are automatically deducted from their paychecks.

Several types of insurance are provided by employers, the most common of which are health, life, and disability. Some employers will offer forms of insurance coverage free of charge as a way to recruit and retain employees.

Types of Bankruptcy

If you learn that your company is filing for bankruptcy, the first thing to find out from your benefits department is which type of bankruptcy has been chosen.

There are two main categories, or chapters, of bankruptcy law under which a company can file. These are Chapter 11 and Chapter 7.

Under a Chapter 11 bankruptcy, a company can continue in business under court protection as it financially reorganizes itself. The company may take cost-cutting measures, including layoffs or salary and benefit reductions.

However, filing for Chapter 7 bankruptcy has much more direct and dire consequences for employees. A company shuts down completely and liquidates its assets to satisfy its creditors' financial claims.

Once you know the type of bankruptcy chapter that applies to your employer, you can make plans for the continuation of your insurance coverage.

Chapter 11 Bankruptcy

If your employer files for Chapter 11 bankruptcy, it may drop its employee insurance benefits, cut employees' hours, or lay people off. If you keep your job, you may be able to keep your group insurance coverage if your company maintains its group plans.

Health Insurance and COBRA

Should your employer discontinue all of its health plans in Chapter 11, you will lose your coverage and be unable to continue it through COBRA (the Consolidated Omnibus Budget Reconciliation Act) because your plan no longer exists. On the other hand, should it maintain a group health plan, COBRA may allow you to continue coverage.

If your company employs at least 20 people and you're laid off or your job status changes, causing a loss of insurance coverage, COBRA can help you and your dependents to maintain your current policy because it provides you with an opportunity to buy extended health coverage under your employer’s plan.

Under COBRA, group health insurance coverage can be maintained for up to 18 months. However, you will need to pay both your portion of the premium payment, which you may have been paying through paycheck withholdings, and your employer's portion of the monthly premium amount, plus a 2% fee.

After 18 months in most states, COBRA ends (although depending on the qualifying event, COBRA may extend to 36 months for a spouse or dependent child). At this point, you will need to obtain new health insurance coverage. You might do this through a new employer, by purchasing a new individual plan, or by joining your spouse's plan.

Your employer is required to give you 60 days notification before your coverage ends. During that period, be sure to obtain a certificate of creditable coverage, which you will need to apply for a new policy.

If you lose your group plan benefits because they're discontinued, confirm whether your employer offers a conversion option that would allow you to get individual health coverage.

Life and Disability Insurance

If you have life and/or disability insurance coverage through work, you may lose that coverage, either because your job has changed or been eliminated, or the company cancels its group plans. If that happens, talk with your insurance administrator to find out if you can transfer from your group policy to an individual policy.

Chapter 7 Bankruptcy

In the event that your employer files for Chapter 7 bankruptcy, you will lose all forms of employer-based group insurance coverage because those plans will cease to exist.

As soon as you learn that your company is filing for Chapter 7 bankruptcy, check on any outstanding insurance claims that you have submitted for payment and reimbursement.

If those claims are not paid out before the company closes, you may need to file a "proof of claims" with the bankruptcy court.

If you elected to have money withheld from your paychecks and deposited into a flexible spending account (FSA) for healthcare expenses, you should check with your company's benefits administrator to ensure that you receive compensation for the sums withheld.

Converting From Group to Individual Coverage

Some insurance companies will allow you to convert from a canceled group plan to an individual plan.

Typically, you will not have to provide any additional information when applying for an individual policy. However, you will need to complete some paperwork and cover all premium payments.

The rules for converting to a personal policy vary by state, so you will need to check with your state insurance association.

There is a small window of time in which you are allowed to convert from a group to an individual plan, so be sure to file papers in time.

Also, keep in mind that in addition to shouldering the premium costs, you may find that some levels of coverage change with an individual plan. So plan ahead to avoid any surprises.

The Bottom Line

A company's bankruptcy can mean significant changes for your insurance coverage, whether you keep your job or your workplace shuts down.

If you're concerned about your company's financial health and want to know how bankruptcy could affect you, take the time now to review your current insurance coverage.

Learn what options you may have to continue your current group plan coverage or to convert from a group plan to an individual plan.