Employee Benefits:

Effect of Bankruptcy on Retiree Health Benefits

HRD-91-115: Published: Aug 30, 1991. Publicly Released: Sep 25, 1991.

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Pursuant to a congressional request, GAO provided information on the effect of employer bankruptcy on retiree health benefits, focusing on: (1) selected bankrupt companies' continued provision of health benefits to their retirees; (2) the extent to which legislation has helped protect retiree health benefits; and (3) effects of bankruptcy on active workers and retirees in company health plans when the companies have assumed the risk of paying health claims directly rather than purchasing insurance.

GAO found that: (1) almost half of the 40 bankrupt companies surveyed terminated retiree health benefits, leaving 91,000 retirees responsible for their own health coverage, either permanently or for periods ranging from 1 to 16 months; (2) laws designed to protect retiree health benefits in bankruptcy did not prevent companies from terminating benefits because the firms either were not subject to the U.S. bankruptcy code, which provides protection for these benefits, were permitted by law to terminate benefits because they had terminated active workers' benefits as well, or had the approval of the bankruptcy court to do so; (3) once a company enters bankruptcy, Congress, companies, and courts have limited opportunity to secure retirees' health benefits; (4) officials from some companies stated that benefits were terminated because the company either lacked unsecured assets to pay retiree benefits, abandoned its attempt to reorganize and was liquidated, or was bought out while in bankruptcy and the purchasing company did not continue the retiree health benefits; (5) both the Federal Deposit Insurance Corporation and the Resolution Trust Corporation terminate retiree health benefits when taking control of a failed financial institution in order to preserve the institution's assets; and (6) retirees from companies that self-insured were more likely to have unpaid claims for covered health services received before the plan terminated, and subsequent reimbursement ranged from full to none.

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