What Happens to an Employee’s Interest If an Employer Goes Bankrupt?

When discussing an employee’s interest, both the covered employee and his beneficiaries have only the status of an unsecured creditor. A living employee typically has no rights under a DBO plan, since there are no obligations that become fixed until and unless the employee dies while working for the employer. Beneficiaries, as unsecured creditors, have no priority claim to any employer assets, including life insurance used by the employer to finance potential obligations. The likelihood is that beneficiaries would take a pro-rata share of the assets that remain (if any) after any secured creditors and priority unsecured claimants have been satisfied in the employee’s interest.

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Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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