When Your Hospital Struggles...How does that impact your 457(b) or 409(a) Retirement Plan?
- Daniel Harris
- Apr 10
- 6 min read
Updated: 5 days ago
When the Hospital Struggles: What It Means for Your 457(b) or 409(a) Retirement Plan
If you work in healthcare and participate in a 457(b) or 409(a) retirement plan, the financial health of your employer — especially if it's a nonprofit hospital — is more than just background noise. It could directly affect your retirement savings. While most people assume that once their money is set aside for retirement, it's safe, these particular types of deferred compensation plans work a bit differently.
Understanding 457(b) and 409(a) Plans (sometimes called a SERP Plan or a non-qualified deferred compensation plan)
457(b) and 409(a) plans are non-qualified deferred compensation plans, typically offered to executives, physicians, and other highly compensated employees. Unlike 401(k) or 403(b) plans, these are considered “unsecured promises to pay.” That means the money set aside for you is not protected in a separate trust account. Instead, it remains part of the hospital’s general assets — and that's where the risk comes in, because it means creditors may be able to seize assets in your 457(b) or 409(a) plan if your hospital goes under.
Before saying this I want to clear that even though Northern Light Healthcare was featured in this article, their credit rating of BB- as of 4/10/25, means that while their debt is not considered top quality that does not mean that they are at serious risk of failing in the short term, in the opinion of the credit rating agencies like Standard and Poor's or Moody's.
You should know that bond ratings or debt ratings typically go from AAA to CCC. If you were to compare this to grades in school AAA is like an A+, AA is an A, A is an A-. The credit ratings go all the way down the C-. Generally a BBB rating (basically a B+ in school) is considered to be a very safe bond. Northern Light fell from BBB to BB- which basically is like going from a B+ in school to amost getting a B but almost a B-. The credit rating is not as good as before but it isn't like they are going to fail the class this year..
The most dangerous bond ratings are C's (CCC, CC, C) as the default rates for a C rated bond can sometimes be as high as 30% over the next 5 years. So if you have a lot of money in a non-profit hospital 457(b) or 409(a) plan paying attention to credit ratings is important and you can do this youself by just typing in your hospital name into google along with "credit rating." Companies like Standard & Poor's, Moody's or Fitch generally make their ratings somewhat public.
The Link Between Employer Solvency and Your Retirement
Because your 457(b) or 409(a) may be part of your employer’s general assets, it’s vulnerable if the hospital experiences serious financial trouble. If your hospital files for bankruptcy, your retirement funds could be treated just like any other corporate liability. You would become an unsecured creditor, which means you’d have to stand in line with others hoping to recover money. Unfortunately, unsecured creditors are often among the last to get paid — if they get paid at all.
A Real-World Example: Chrysler Executives
A stark example of this risk occurred during the 2009 Chrysler bankruptcy. Many of Chrysler’s executives had substantial balances in non-qualified deferred compensation plans — some worth hundreds of thousands or even millions. When Chrysler filed for bankruptcy, those plans weren’t protected. Since the deferred compensation was considered part of Chrysler's general assets, the executives became unsecured creditors. The outcome? Many of them lost their entire deferred comp savings. This case serves as a cautionary tale: even high-level employees at large companies aren't immune to the risks of non-qualified plans when financial collapse occurs.
I'm certainly not saying that a financial collapse of any hospital is imminent, but the changes that we're seeing in Maine medicine are really challenges that we're seeing all throughout the United States to a lesser degree. As the rest of US catches up to the average age of Mainers, (Mainers are about 6 years older on average than the typical American), I predict that we will see challenges in other health systems especially if things like medicare reimbursements can't be sufficiently increased over time.
How to know if your hospital is in real trouble and it could impact your 409(a) or 457(b) retirement assets
If you’re relying heavily on a 457(b) or 409(a) for retirement, it’s important to stay informed and aware about your hospital’s financial health. Look out for signs like:
Credit downgrades (into CCC, CC, or C ratings) from companies like Moody's or Standard and Poor's
News of debt covenants being breached by the hospital
Sudden and ongoing leadership changes
And most reliably you can review the form 990s for a non-profit hospital which give a very accurate, not - spin take on the hospital's finances. On a form 990, which are public information, you can see the financials of a non-profit. What is important to focus on is how much they have left in equity (which is assets - liability = equity) versus how much money they are losing each year if they are losing money. A hospital or any non-profit can lose money for a long time but each year they lose money their equity goes down and when their equity goes beneath zero they are bankrupt. But there are generally rules or convenants regarding debt sometimes breaching a convenant alone is enough for the bondholders to take control of a company and possibly take your 457(b) or 409(a) retirement assets (but not your 403(b) assets as collateral.
These could signal deeper issues that might threaten your deferred compensation.
If this happens, what can you do?
While you can’t always predict or prevent a hospital's financial decline, you can take steps to protect yourself:
Understand going in how the different retirement savings vehicles work and make an educated guess about the financial stability of your employer and industry when selecting the distribution options of a 457(b) or 409(a) plan. 457(b) and 409(a) plans can be fine retirement savings vehicles but often when you join an employer you may have to make an election on your distribution options within your first year and that choice is sometimes irrevocable. Because these accounts can be seized by the hospitals creditors be thoughtful about which distribution option you choose.
Consider reviewing your termination/distribution elections if you are within 5 years of retirement or you have a substantial sum in your 457(b) or 409(a) that you want to protect. You may have filed out your termination/distribution elections a long time ago for these plans. Generally these plans will pay out your balance in a one year period or over a 5 year period from what I've seen which starts when you hit a certain age or change employers. If you had $300,000 in one of these plans and you became very concerned about your employer's financial situation, you may be able to just leave the employer and get your money out. Just know however bankruptcy proceedings often have a clawback period going back a certain period of time before a bankruptcy filing when a creditor can get assets that were transfered out and seize them.
Talk to a financial advisor. Especially one familiar with healthcare and executive compensation — they can help you calculate the potential probability that your employer might go under before you leave, and they can inform you of certain strategies of protected your assets as much as possible.
Just to be clear, the purpose of this article is to educate you. Before making any decisions I recommend that you talk to your own financial advisor or other professional advisor and/or do your own research.
If you are an MD or DO with money invested in your group's non-qualified deferred compensation plan and you have questions about your plan and you'd like to book at conversation feel free to fill out our firm's contact form and we'll reach out to you to set up a call.
Altneratively, if you'd like to learn a little bit more about Daniel Harris and D.R. Harris & Co. and who we work with you can learn about that here and here.
