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The Employee Retirement Income Security Act of 1974, or
ERISA, protects the assets of millions of Americans so that funds placed
in retirement plans during their working lives will be there when they
retire.
ERISA is a federal law that sets minimum standards for
pension plans in private industry. For example, if an employer
maintains a pension plan, ERISA specifies when an employee must be allowed
to become a participant, how long they have to work before they have a non-forfeitable interest in their pension, how long a participant can be
away from their job before it might affect their benefit, and whether
their spouse has a right to part of their pension in the event of their
death. Most of the provisions of ERISA are effective for plan years
beginning on or after January 1, 1975.
ERISA does not require any employer to establish a
pension plan. It only requires that those who establish plans must
meet certain minimum standards. The law generally does not specify
how much money a participant must be paid as a benefit.
ERISA does the following:
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Requires plans to provide participants with
information about the plan including important information about plan
features and funding. The plan must furnish some information
regularly and automatically. Some is available free of charge,
some is not.
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Sets minimum standards for participation, vesting,
benefit accrual and funding. The law defines how long a person
may be required to work before becoming eligible to participate in a
plan, to accumulate benefits, and to have a non-forfeitable right to
those benefits. The law also establishes detailed funding rules
that require plan sponsors to provide adequate funding for your plan.
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Requires accountability of plan fiduciaries.
ERISA generally defines a fiduciary as anyone who exercises
discretionary authority or control over a plan's management or assets,
including anyone who provides investment advice to the plan.
Fiduciaries who do not follow the principles of conduct may be held
responsible for restoring losses to the plan.
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Gives participants the right to sue for benefits
and breaches of fiduciary duty.
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Guarantees payment of certain benefits if a defined
plan is terminated, through a federally chartered corporation, known
as the Pension Benefit Guaranty Corporation.
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Generally speaking, there are two types of pension
plans: defined benefit plans and defined contribution plans. A
defined benefit plan promises participants a specified monthly benefit at
retirement. The plan may state this promised benefit as an exact
dollar amount, such as $100 per month at retirement. Or, more
commonly, it may calculate a benefit through a plan formula that considers
such factors as salary and service - for example, 1 percent of average
salary for the last 5 years of employment for every year of service with
an employer.
A defined contribution plan, on the other hand, does
not promise a specific amount of benefits at retirement. In these
plans, the participant or the employer (or both) contribute to the
participant's individual account under the plan, sometimes at a set rate,
such as 5 percent of their earnings annually. These contributions
generally are invested on the participant's behalf. The participant
will ultimately receive the balance in their account, which is based on
contributions plus or minus investment gains or losses. The value of
the account will fluctuate due to changes in the value of investments.
Examples of defined contribution plans 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.
A money purchase pension plan is a plan that requires
fixed annual contributions from an employer to a participant's individual
account. Because a money purchase pension plan requires these
regular contributions, the plan is subject to certain funding and other
rules. |
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An employer may sponsor a simplified employee pension
plan or SEP. SEPs are relatively uncomplicated retirement savings
vehicles. A SEP allows employers to make contributions on a
tax-favored basis to individual retirement accounts (IRAs) owned by the
employees. SEPs are subject to minimal reporting and disclosure
requirements.
Under a SEP, the employee must set up an IRA to accept
the employer's contributions. As a general rule, the employer can
contribute up to 25 percent of the employee's pay into a SEP each year, up
to a maximum of $40,000.
Starting January 1, 1997, employers may no longer set
up Salary Reduction SEPs. However, the Small Business Job Protection
Act of 1996 (Public Law 104-188) permitted employers to establish SIMPLE
IRA plans beginning in 1997. A SIMPLE IRA plan allows salary
reduction contributions up to $6,000 in 2001 ($7,000 in 2002).
If an employer had a salary reduction SEP in effect on
December 31, 1996, the employer may continue to allow salary reduction
contributions to the plan. Employees are generally permitted to
contribute up to 15 percent of pay, or $10,500 for 2001 ($11,000 for
2002). SEP participants may also be required to earn at least $450
(this number is indexed for inflation) (for 2001) to make salary reduction
contributions. |
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Your employer may establish a defined contribution plan
that is a cash or deferred arrangement, usually called a 401(k) plan.
A participant can elect to defer receiving a portion of their salary which
is instead contributed on their behalf, before taxes, to the 401(k) plan.
Sometimes the employer may match their contributions. There are
special rules governing the operation of a 401(k) plan. For example,
there is a dollar limit on the amount a participant may elect to defer
each year. The dollar limit in 2001 is $10,500 ($11,000 in 2002).
The amount may be adjusted annually by the Treasury Department to reflect
changes in the cost of living. Other limits may apply to the amount
that may be contributed on a participant's behalf. For example, if
the participant is highly compensated, they may be limited depending on
the extent to which rank and file employees participate in the plan.
An employer must advise participant's of any limits that may apply to
them.
Although a 401(k) plan is a retirement plan,
participants may be permitted access to funds in the plan before
retirement. For example, if a participant is an active employee, the
plan may allow them to borrow from the plan. Also, the plan may
permit a withdrawal on account of hardship, generally from the funds the
participant contributed. The sponsor may want to encourage
participation in the plan, but it cannot make participants' elective
deferrals a condition for the receipt of other benefits, except for
matching contributions.
The adoption of 401(k) plans by a state or local
government or a tax-exempt organization is limited by law. |
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A profit sharing or stock bonus plan is a defined
contribution plan under which the plan may provide, or the employer may
determine, annually, how much will be contributed to the plan (out of
profits or otherwise). The plan contains 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. |
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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. |
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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. For example, a plan's
rules may provide that participants in a 401(k) plan would receive payment
of his or her benefits after terminating employment. The plan's SPD
or Summary Plan Description should set forth the plan’s rules for
obtaining the distribution as well as the timing of distribution after
termination of employment.
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Generally, a plan may require a person to reach age 21
to be eligible to participate in the plan and to have a year of service.
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.
Beginning in 2002, there are two basic vesting
schedules. Under the three-year schedule, workers are 100% vested
after three years of service under the plan. The six-year graduated
schedule allows workers to become 20% vested after two years and to vest
at a rate of 20% each year thereafter until they are 100% vested after six
years of service. Plans may have faster vesting schedules. |
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ERISA protects plans from mismanagement and misuse of
assets through its fiduciary provisions. ERISA defines a fiduciary
as anyone who exercises discretionary control or authority over plan
management or plan assets, anyone with discretionary authority or
responsibility for the administration of a plan, or anyone who provides
investment advice to a plan for compensation or has any authority or
responsibility to do so. Plan fiduciaries include, for example, 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 act prudently and must diversify the plan's investments
in order to minimize the risk of large losses. In addition, they
must follow the terms of plan documents to the extent that the plan terms
are consistent with ERISA. They also 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 do not follow these principles of
conduct may be personally liable to restore any losses to the plan, or to
restore 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. |
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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 immediately after the month in which the contributions
either were withheld or received by the employer. |
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In general, pension benefits cannot be taken away from
a participant by people to whom they owe money. The law makes a
limited exception, however, when family support is at stake. Thus, a
state court can award part or all of a participant's pension benefit to
their 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. |
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When a plan receives a domestic relations order
purporting to divide pension benefits, it must first determine whether the
order is a qualified domestic relations order (QDRO). The order must
relate to child support, alimony, or marital property rights and be made
under state domestic relations law. To be qualified, the
order should clearly specify your name and last known mailing address and
the name and last address of each alternate payee. It also must
state the name of your plan; the amount or percentage - or the method of
determining the amount or percentage - of the benefit to be paid to the
alternate payee; and the number of payments or time period to which the
order applies. The order cannot provide a type or form of benefit
not otherwise provided under the plan and cannot require the plan to
provide an actuarially increased benefit. And if an earlier QDRO
applies to your benefit, the earlier QDRO takes precedence over a later
one.
In certain situations, a QDRO may provide that payment
is to be made to an alternate payee before the participant is entitled to
receive their benefit. For example, if the participant is still
employed, a QDRO could require payment to an alternate payee to begin on
or after their earliest retirement age, whether or not the
plan would allow you to receive benefits at that time. |
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Although pension plans must be established with the
intention of being continued indefinitely, employers may terminate plans.
If a plan terminates or becomes insolvent, ERISA provides participants
some protection. In a tax-qualified plan, a participant's accrued
benefit must become 100 percent vested immediately upon plan termination,
to the extent then funded. If a partial termination occurs in such a
plan, for example, if an 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. |
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The U.S. Department of Labor enforces Title I of ERISA,
which, in part, establishes participants' rights and fiduciaries' duties.
However, certain plans are not covered by the protections of Title I.
They are:
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Federal, state, or local government plans,
including plans of certain international organizations.
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Certain church or church association plans.
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Plans maintained solely to comply with state
workers' compensation, unemployment compensation or disability
insurance laws.
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Plans maintained outside the United States
primarily for non-resident aliens.
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Unfunded excess benefit plans - plans maintained
solely to provide benefits or contributions in excess of those
allowable for tax-qualified plans.
The U.S. Department of Labor's Employee Benefits Security Administration
is the agency charged with enforcing the rules
governing the conduct of plan managers, investment of plan assets,
reporting and disclosure of plan information, enforcement of the fiduciary
provisions of the law, and workers' benefit rights. For more
information, call EBSA's Toll-Free Employee & Employer Hotline number at:
1.866.444.EBSA (3272). |
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The Treasury Department's Internal Revenue Service is
responsible for ensuring compliance with the Internal Revenue Code, which
establishes the rules for operating a tax-qualified pension
plan, including pension plan funding and vesting requirements. A
pension plan that is tax-qualified can offer special tax
benefits both to the employer sponsoring the plan and to the participants
who receive pension benefits. The IRS maintains a taxpayer
assistance line for employee plans at 202.283.9516 (1:30-3:30 p.m. EST,
Monday-Thursday).
The Pension Benefit Guaranty Corporation, PBGC, a non-profit,
federally-created corporation, guarantees payment of certain pension
benefits under defined benefit plans that are terminated with insufficient
money to pay benefits. The PBGC may be contacted at:
Pension Benefit Guaranty Corporation
1200 K Street NW
Washington, DC 20005-4026
Tel 202.326.4000
Toll free 800.400.7242
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