The Employee Retirement Income Security Act of 1974 (ERISA) is intended to protect the retirement assets of American workers by setting minimum standards for pension plans in the private sector. For employers that maintain pension plans, ERISA sets certain standards such as how long you must work before you have a "non-forfeitable" interest in your pension and whether your spouse has a right to claim at least some of your pension upon your death. Â
While the law doesn't compel businesses to provide a pension, it does require those that do to meet certain minimum standards. Generally, ERISA doesn't dictate how much money should be put into a pension plan.
There are generally two main kinds of retirement plans. A defined benefit plan promises you a specific amount at retirement, paid monthly. The plan may state this promised benefit as an exact dollar amount, or (more commonly) it may calculate a benefit through a plan formula that considers factors such as salary and years of service.
A defined contribution plan, meanwhile, doesn't promise a specific benefit amount at retirement. In these plans, you and/or your employer contribute to your account under the plan, sometimes at a set rate (such as 5 percent of your annual earnings). The value of your account fluctuates with respect to changes in the value of your investments. Examples include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. The general rules of ERISA apply to each of these types of plans, but some special rules also apply.Â
SEPs are somewhat simple retirement savings arrangements that allow employers to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. Under an SEP, you set up an IRA to accept employer contributions. Generally, your employer can contribute up to 25 percent of your pay into a SEP each year (up to $40,000).
Any employer who had a salary reduction SEP in effect on December 31, 1996 (phased out in 1997) may continue to allow contributions to the plan. Employees are generally permitted to contribute up to 15 percent of pay.
A 401(k) plan is a defined contribution plan. You can elect to defer a portion of your salary and have it contributed to the 401(k) on your behalf -- before taxes. Sometimes the employer will match your contributions. The 401(k) is subject to certain rules, such as a dollar limit on the amount you may defer each year. Other limits may apply to the amount that may be contributed on your behalf, which your employer must advise you of.
Although a 401(k) plan is for retirement, you may access these funds before retirement under certain conditions. For example, your plan may permit you to make a withdrawal on account of hardship (generally from the funds you contributed).
The adoption of 401(k) plans by a state or local government or a tax-exempt organization is limited by law.
A profit sharing or stock bonus plan is a defined contribution plan under which your employer may determine how much will be contributed to the plan annually. Such plans contain a formula for allocating to each participant a portion of each annual contribution. A profit sharing plan or stock bonus plan may include a 401(k) plan.
Employee stock ownership plans (ESOPs) are a form of defined contribution plan in which the investments are primarily in employer stock. Congress authorized the creation of ESOPs as one method of encouraging employee participation in corporate ownership.
ERISA requires plan administrators to give the most important facts you need to know about your pension plan, some of which must be provided to you regularly and automatically. Others are available upon request, which should be made in writing.
A summary of the plan, called the summary plan description or SPD, is one of the most important documents to which you're entitled. The SPD tells you what the plan provides and how it operates; when you begin to participate in the plan; how your service and benefits are calculated; when your benefit becomes vested; when you will receive payment and in what form; and how to file a claim for benefits. You must be informed if your plan is changed, either through a revised SPD or in a separate document called a summary of material modifications.
In addition, the administrator must automatically give you each year a copy of the plan's summary annual report, which is available to you at no cost. To learn more about your plan's assets, you may ask the plan administrator for a copy of the annual report in its entirety.
Generally, a plan may require a person to reach age 21 and have at least one year of service to be eligible to participate in the plan. The term "vesting" means the employee has earned a non-forfeitable right to benefits funded by employer contributions (employees always have a non-forfeitable right to their own contributions).
There are two basic vesting schedules. Under the three-year schedule, workers are 100 percent vested after five years of service. The six-year graduated schedule allows workers to become 20 percent vested after two years and to vest at a rate of 20 percent each year thereafter until they are 100 percent vested after six years of service.
ERISA protects your plan from mismanagement and misuse of assets through its fiduciary provisions. Plan fiduciaries include plan trustees, plan administrators, and members of a plan's investment committee.
The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must avoid conflicts on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, service providers, or the plan sponsor.
Fiduciaries who fail to follow these rules of conduct may be personally liable to restore any losses to the plan, or any profits made through improper use of plan assets. Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA, including their removal.
Employers must transmit employee contributions to pension plans as soon as they can reasonably be segregated from the employer's general assets, but not later than the 15th business day of the month following the month in which the contributions were either withheld or received by the employer.
In some defined contribution plans, a group or an individual makes all the investment decisions. But in certain defined contribution plans, plan officials may instead provide several different investment options, and they may ask you to decide how to invest your account balance.
Under Department of Labor rules, if you truly exercise independent control in making your investment choices, plan officials will be excused from the fiduciary responsibility. A plan under which you in fact exercise independent control over the investment of your individual account is called a 404(c) plan (after section 404(c) of ERISA). If you are a participant in a 404(c) plan, you are responsible for the consequences of your investment decision, which means plan officials are not liable for any investment outcomes.
Since you're are entitled to receive information about the investment choices available under a 404(c) plan, one that intends to relieve plan officials of fiduciary duties over investments must inform you of that fact. A 404(c) plan also must give you adequate information about investment options under the plan for you to be able to make informed decisions.
As limitations on distribution of payment vary depending on the type of pension plan, you should consult your summary plan description for the specifics about receiving your benefits. After the event occurs that permits payment of your benefit, your plan may require a waiting period in which to calculate your benefit and determine your payment schedule, or to value your account balance and to liquidate any investments in which your account is invested.
If your plan is a defined benefit plan or a money purchase plan, it will set a normal retirement age. These types of plans may permit earlier payments, either by providing for early retirement benefits for which the plan may set additional eligibility requirements or by permitting benefits to be paid when you terminate employment, suffer a disability, or die.
If your plan is a 401(k) plan, you may be permitted to take some or all of your vested accrued benefit when you terminate employment, retire, die, become disabled, or suffer a hardship.
If your plan is a profit-sharing plan or a stock bonus plan, you may be permitted to receive your vested accrued benefit after you terminate employment, become disabled, die, reach a specific age, or after a specific number of years have passed.
ERISA requires all plans to have a reasonable written procedure for processing claims and for appealing if your claim is denied. The summary plan description contains a description of these procedures.
If your benefits claim is denied, the plan must notify you in writing (generally within 90 days) of the reason and the specific plan provisions on which the denial is based. If the plan denies your claim because the administrator needs more information, the administrator must tell you what is needed. Any notice of denial must also tell you how to file an appeal.
You must be allowed at least 60 days to appeal any denial. After receiving your appeal, the plan generally must issue a ruling within 60 days. If the plan notifies you that it must hold a hearing or has other special circumstances, it may have an additional 60 days.
You must be provided with a final decision on your appeal and the reasons for the decision with references to the relevant plan documents. If you disagree with the final decision, you may then file a lawsuit seeking your benefit under ERISA. Courts generally require that you complete all the steps available to you under the claims procedure in a timely manner before seeking relief through the courts.
Generally, the law requires plans to pay retirement benefits no later than the time a participant reaches normal retirement age. But, many plans -- including 401(k) plans --provide for earlier payments under certain circumstances. The plan's SPD should explain the plan's rules for obtaining the distribution as well as the timing of distribution after termination of employment.
ERISA provides some protection to surviving spouses of deceased participants who had earned a vested pension benefit. This depends on the type of plan and whether the participant dies before or after payment of the pension benefit is scheduled to begin, otherwise known as the annuity starting date. Check your plan's SPD for details.
In a defined benefit plan or a money purchase plan must be a series of equal, periodic payments over your lifetime, with a payment continuing to your spouse for the rest of their life if they survive you. This periodic payment must be at least 50 percent (not more than 100 percent) of the periodic payment received during your joint lives. This form of payment is called a qualified joint and survivor annuity (QJSA).
If the plan provides other forms of benefit payment, and you and your spouse want to waive your rights to receive the QJSA and select one of the other payment forms available, you can do so according to specified rules. You and your spouse must receive an explanation of the QJSA, your waiver must be made in writing within certain time limits, and your spouse must provide consent to the waiver in writing.
In general, your pension benefits can't be taken away from you by people to whom you owe money; however, there is an exception when family support is at stake. This means a state court can award part or all of your pension benefit to your spouse, former spouse, child, or other dependent by issuing a qualified domestic relations order, which must be honored by the plan. The person named in such an order is called an alternate payee. The court's order can be in the form of a state court judgment, decree or order, or court approval of a property settlement agreement.
Employers may indeed terminate plans. If your plan terminates or becomes insolvent, ERISA provides you some protection. In a tax-qualified plan, your accrued benefit must become 100 percent vested immediately upon plan termination. If a partial termination occurs in such a plan, for example, if your employer closes a particular plant or division that results in the termination of employment of a substantial portion of plan participants, immediate 100 percent vesting, to the extent funded, also is required for affected employees.
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. But if you're in a defined benefit plan, your benefits begin at retirement age. These types of plans are less likely to contain a provision that enables you to withdraw money early.
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.
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.
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.
Retirement planning is something we often put off until it's too late -- but it's crucial that workers ensure they have a large enough nest egg to get them through retirement and old age. If you believe your pension is being mishandled, possibly in violation of ERISA or other laws, you may want to speak with an attorney. Get peace of mind today with a free legal evaluation of your situation by an employment law attorney.
