What You Should Know About Your Retirement Plan Printer Friendly Version PDF Version Introduction Your employer’s retirement savings plan is an essential part of your future financial security. It is important to understand how your plan works and what benefits you will receive. Just as you would keep track of money that you put in a bank or other financial institution, it is in your best interest to keep track of your retirement benefits. Those responsible for the management and oversight of your retirement plan must follow certain rules for operating the plan, handling the plan’s money and overseeing the firms that manage the money. You should also understand and monitor your retirement plan and your benefits. You will find Action Items in each chapter to assist you in doing this. This booklet helps you understand your plan and explains what information you should review periodically and where to go for help with questions. It includes information on:
Retirement Plans Covered In This Booklet This booklet covers private retirement plans that are governed by Federal laws and guidelines in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. ERISA is a Federal statute that sets standards for most employer and union sponsored retirement plans in private industry and imposes responsibilities on those running the plan. Participants in these plans have certain rights as well as responsibilities. The rules discussed in this booklet do not apply to all retirement plans. For example, the information does not apply to:
Also, if you are in a collectively-bargained plan, the rules that apply under ERISA may be different in some cases. The information contained in this guide answers the most common questions about retirement plans. Keep in mind, however, that this booklet is a simplified summary of participant rights and responsibilities, not a legal interpretation of ERISA. Chapter 1: Types Of Retirement Plans The first step to understanding your retirement benefits is to find out what kind of retirement plan your employer has. There are two major types of plans, defined benefit and defined contribution, which are described here and outlined in Table 1. Keep in mind that your employer may have more than one type of plan, and may have different participation requirements for each. A defined benefit plan, funded by the employer, promises you a specific 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 often, it may calculate your benefit through a formula that includes factors such as your salary, your age, and the number of years you worked at the company. For example, your pension benefit might be equal to 1 percent of your average salary for the last 5 years of employment times your total years of service. A defined contribution plan, on the other hand, does not promise you a specific benefit amount at retirement. Instead, you and/or your employer contribute money to your individual account in the plan. In many cases, you are responsible for choosing how these contributions are invested, and deciding how much to contribute from your paycheck through pretax deductions. Your employer may add to your account, in some cases by matching a certain percentage of your contributions. The value of your account depends on how much is contributed and how well the investments perform. At retirement, you receive the balance in your account, reflecting the contributions, investment gains or losses, and any fees charged against your account. The 401(k) plan is a popular type of defined contribution plan, and there are three types of 401(k) plans: traditional, SIMPLE 401(k), and Safe Harbor 401(k) plans. The SIMPLE-IRA plan, SEP, employee stock ownership plan (ESOP), and profit-sharing plan are other examples of defined contribution plans. (See explanations of the various types of plans in the Glossary at the end). Note
Action Item Ask your plan administrator, human resources office or employer for information on what type of plan or plans you have at work. You can ask for a copy of the Summary Plan Description (the retirement plan booklet that you should receive when you enroll in the plan) and review the information about the plan. |
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Chapter 2: Earning Retirement Benefits Once you have learned what type of retirement plan your employer offers, you need to find out when you can participate in the plan and begin to earn benefits. Plan rules can vary as long as they meet the requirements under Federal law. You need to check with your plan or review the plan booklet (Summary Plan Description) to learn your plan’s rules and requirements. Your plan may require you to work for the company for a period of time before you may participate in the plan. In addition, there typically is a time frame for when you begin to accumulate benefits and earn the right to them (sometimes referred to as “vesting”). Who can participate in your employer’s retirement plan? When can your participation begin? Employers have some flexibility to require additional years of service in some circumstances. For example, if your plan allows you to vest (discussed in detail later in this chapter) immediately upon participating in the plan, it may require that you work for the company for two years before you may participate in the plan. Federal law also imposes other participation rules for certain circumstances. For example, if you were an older worker when you were hired, you cannot be excluded from participating in the plan just because you are close to retirement age. Some 401(k) plans enroll employees automatically. This means that you will automatically become a participant in the plan unless you choose to opt out. The plan will deduct a set contribution level from your paycheck and put it into a predetermined investment. If your employer has a 401(k) plan, find out whether your plan has automatic enrollment, the date your participation begins, and where the funds are invested. Plans with automatic enrollment must provide you an opportunity once a year to change the contribution rate or to opt out of the plan. (Note: Check your plan booklet for information on when you may change your investment choices.) When do you begin to accumulate benefits? Defined benefit plans often count your years of service in order to determine whether you have earned a benefit and also to calculate how much you will receive in benefits at retirement. Employees in the plan who work part-time, but who work 1,000 hours or more each year, must be credited with a portion of the benefit in proportion to what they would have earned if they were employed full time. In a defined contribution plan, your benefit accrual is the amount of contributions and earnings that have accumulated in your 401(k) or other retirement plan account, minus any fees charged to your account by your plan. Special rules for when you begin to accumulate benefits may apply to certain types of retirement plans. For example, in a Simplified Employee Pension Plan (SEP), all participants who earn at least $450 a year from their employers are entitled to receive a contribution. Can a plan reduce promised benefits? Also, in most situations, if a company terminates a defined benefit plan that does not have enough funding to pay all of the promised benefits, the Pension Benefit Guaranty Corporation will pay plan participants and beneficiaries some retirement benefits, but possibly less than the level of benefits promised. (For more information, see the PBGC’s Web site.) In a defined contribution plan, the employer may change the amount of employer contributions in the future. Depending on the plan terms, the employer may also be able to stop making contributions for a few years or indefinitely. Finally, an employer may terminate a defined benefit or a defined contribution plan, but may not reduce the benefit you have already accrued in the plan. How soon do you have a right to your accumulated benefits? However, you do not necessarily have an immediate right to any contributions made by your employer. Federal law provides a maximum number of years a company may require employees to work to earn the vested right to all or some of these benefits. (See tables below showing the vesting rules). In a defined benefit plan, an employer can require that employees have 5 years of service in order to become vested in the employer funded benefits. Employers also can choose a graduated vesting schedule, which requires an employee to work 7 years in order to be 100 percent vested, but provides at least 20 percent vesting after 3 years, 40 percent after 4 years, 60 percent after 5 years, and 80 percent after 6 years of service. The permitted vesting schedules for current defined benefit plans are shown in Table 3 below. Plans may provide a different schedule as long as it is more generous than these vesting schedules. In a defined contribution plan such as a 401(k) plan, you are always 100 percent vested in your own contributions to a plan, and in any subsequent earnings from your contributions. However, in most defined contribution plans you may have to work several years before you are vested in the employer’s matching contributions. (There are exceptions, such as the SIMPLE 401(k) and the Safe Harbor 401(k), in which you are immediately vested in all required employer contributions.) Currently, employers have a choice of 2 different vesting schedules for employer matching 401(k) contributions, which are shown in Table 2. Your employer may use a schedule in which employees are 100 percent vested in employer contribution after 3 years of service, called cliff vesting. Under graduated vesting, an employee must be at least 20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years. You may lose some of the employer-provided benefits you have earned if you leave your job before you have worked long enough to be vested. However, once vested, you have the right to receive the vested portion of your benefits even if you leave your job before retirement. But even though you have the right to certain benefits, your defined contribution plan account value could decrease after you leave your job as a result of investment performance. Note If you leave your company and return, you may be able to count your earlier period of employment towards the years of service needed for vesting in the employer-provided benefits. Unless your break in service with the company was 5 years or the time equal to the length of your pre-break employment, whichever is greater, you likely can count that time prior to your break. Because these rules are very specific, you should read your plan document carefully if you are contemplating a short-term break from your employer, and then discuss it with your plan administrator. If you left employment prior to January 1, 1985, different rules apply. For more information, contact the Department of Labor toll free at 1.866.444.EBSA (3272). |
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Note For plans subject to collective bargaining agreements, the effective date is the earlier of the date on which the last of the collective bargaining agreements under which the plan is maintained terminates or ---
Action Items
Chapter 3: Plan Information To Review If you have a question about your retirement plan, you can start by looking for an answer in the information that the plan provides. You can request this information from your plan administrator, the person who is in charge of running the plan. Your employer can tell you how to contact your plan administrator. Information Provided By The Retirement Plan Each retirement plan is required to have a formal, written plan document that details how it operates and its requirements. As noted previously, there is also a booklet that describes the key plan rules, called the Summary Plan Description (SPD), which should be much easier to read and understand. The SPD should include a summary of any material changes to the plan or to the information required to be in the SPD. In many cases, you can start with the SPD and then look at the plan document if you still have questions. In addition, plans must provide you with a number of notices. Some of the key notices are described in Table 5. For example, defined contribution plans, such as 401(k) plans, generally are required to provide advance notice to employees when a “blackout period” occurs. A blackout period is when a participant’s right to direct investments, take loans, or obtain distributions is suspended for a period of at least three consecutive business days. Blackout periods can often occur when plans change recordkeepers or investment options. Some plan information, such as the Summary Plan Description, must be provided to you automatically and without charge at the time periods indicated below. You may request a Summary Plan Description at other times, but your employer might charge you a copying fee. You must ask the plan if you want other information, such as a copy of the written plan document or the plan’s Form 5500 annual financial report, and you may have to pay a copying fee. See Tables 5 and 6. Many employers provide benefit information on a Web site. In some cases, plans provide information more frequently than required by Federal law. For instance, many large defined contribution plans provide quarterly benefit statements, and some plans allow participants to check their statements online or by telephone. The plan’s annual financial report (Form 5500) is also available (there is a copying fee if over 100 pages) by contacting the U.S. Department of Labor, EBSA Public Disclosure Facility, Room N-1513, 200 Constitution Avenue, NW, Washington, D.C. 20210, Tel: 202.693.8673. In addition, if your plan administrator does not provide you, as a participant covered under the plan, with a copy of the Summary Plan Description automatically or after you request it, you may contact the Department of Labor toll free at 1.866.444.EBSA (3272) for help. |
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What plan information should you review regularly? Many defined contribution plans, including 401(k) plans, send participants individual benefit statements. If you receive a statement, check it to make sure all of the information is accurate. This information may include:
Action Items
Chapter 4: Payment Of Benefits Once you understand what type of plan you have, how you earn benefits, and how much your benefits will be, it is important to learn when and how you can receive them. When can you begin to receive retirement benefits?
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*For administrative reasons, benefits do not begin immediately after meeting these conditions. At a minimum, your plan must provide that you will start receiving benefits within 60 days after the end of the plan year in which you satisfy the conditions. Also, you need to file a claim under your plan’s procedures. (See Chapter 6) Under certain circumstances, your benefit payments may be suspended if you continue to work beyond normal retirement age. The plan must notify you of the suspension during the first calendar month or payroll period in which payments are withheld. This information should also be included in the Summary Plan Description. A plan also must advise you of its procedures for requesting an advance determination of whether a particular type of reemployment would result in a suspension of benefit payments. If you are a retiree and are considering taking a job, you may wish to write to your plan administrator and ask if your benefits would be suspended. Table 7 shows the general requirements for when payments begin. Listed below are some permitted variations:
Warning
When is the latest you may begin to take payment of your benefits? In what form will your benefits be paid? If you are leaving your employer before retirement age, see the next chapter. Can a benefit continue for your spouse should you die first? In most 401(k) plans and other defined contribution plans the plan is written so different protections apply for surviving spouses. In general, in most defined contribution plans if you should die before you receive your benefits, your surviving spouse will automatically receive them. If you wish to select a different beneficiary, your spouse must consent by signing a waiver, witnessed by a notary or plan representative. If you were single when you enrolled in the plan and subsequently married, it is important that you notify your employer and/or plan administrator and change your status under the plan. If you do not have a spouse, it is important to name a beneficiary. If you or your spouse left employment prior to January 1, 1985, different rules apply. For more information on these rules, contact the Department of Labor toll free at 1.866.444.EBSA (3272). Can you borrow from your 401(k) plan account? Can you get a distribution from your plan if you are not yet 65 or your plan’s
normal retirement age but are facing a significant financial hardship? Action Items
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Chapter 5: Taking Your Retirement Benefit With You If you leave an employer before you reach retirement age, whether or not you can take your benefits out and/or roll them into another tax-qualified plan or account will depend on what type of plan you are in. If you leave before retirement, can you take your retirement benefit with
you? If you are in a cash balance plan, you probably will have the option of transferring at least a portion of your account balance to an individual retirement account or to a new employer’s plan. If you leave your employer before retirement age and you are in a defined contribution plan (such as a 401(k) plan), in most cases you will be able to transfer your account balance out of your employer’s plan. What choices do you have for taking your defined contribution benefits?
Please note: If you elect a lump sum payment and do not transfer the money to another retirement account (employer plan or IRA other than a Roth IRA), you will owe a tax penalty if you are under age 59½ and do not meet certain exceptions. In addition, you may have less to live on during your retirement. Transferring your retirement plan account balance to another plan or an IRA when you leave your job will protect the tax advantages of your account and preserve the benefits for retirement. What happens if you leave a job and later return? If you retire and later go back to work for a former employer, you must be allowed to continue to accrue additional benefits, subject to a plan limit on the total years of service credited under the plan. Action Items
Chapter 6: Filing A Claim For Benefits Federal retirement law requires all plans to have a reasonable written procedure for processing your benefits claim and appeal if your claim is denied. The Summary Plan Description (SPD) should include your plan’s claims procedures. Usually, you fill out the required paperwork and submit it to the plan administrator, who then can tell you what your benefits will be and when they will start. Filing A Claim And Filing An Appeal If there is a problem or a dispute about whether you qualify for benefits or what amount you should receive, check your plan’s claims procedure. Federal law outlines the following claims procedures requirements:
If you believe the plan failed to follow ERISA’s requirements, you may decide to seek legal advice if the plan denies your appeal. You also can contact the Department of Labor concerning your rights under ERISA by calling toll free at 1.866.444.EBSA (3272). For more information on claims procedures, see the Department of Labor publication, Filing a Claim for Your Retirement Benefits at www.dol.gov/ebsa or call toll free at 1.866.444.EBSA (3272). Action Items
Chapter 7: Responsibilities Of Plan Fiduciaries In every retirement plan, there are individuals or groups of people who use their own judgment or discretion in administering and managing the plan or who have the power to or actually control the plan’s assets. These individuals or groups are called plan fiduciaries. Fiduciary status is based on the functions that the person performs for the plan, not just the person’s title. Does your plan have to identify those responsible for operating the plan? What are the responsibilities of plan fiduciaries?
The fiduciary also is responsible for selecting the investment providers and the investment options, and for monitoring their performance. Some plans, such as most 401(k) or profit sharing plans, can be set up to permit participants to choose the investments in their accounts (within certain investment options provided by the plan). If the plan is properly set up to give participants control over their investments, then the fiduciary is not liable for losses resulting from the participant’s investment decisions. Department of Labor rules provide guidance designed to make sure participants have sufficient information on the specifics of their investment options so they can make informed decisions. This information includes:
A statement that the plan is intended to follow the Department of Labor rules and that the fiduciaries may be relieved of liability for losses that are the direct and necessary result of a participant’s investment instructions also must be included. What if a plan fiduciary fails to carry out its responsibilities? When does the employer need to deposit employee contributions in the plan? What are the plan fiduciaries’ obligations regarding the fees and expenses
paid by the plan? Can the plan charge my defined contribution plan account for
fees? The plan may deduct fees from your defined contribution plan account. Plan administration fees and investment fees can be deducted from your account either as a direct charge or indirectly as a reduction of your account’s investment returns. Fees for individual services, such as for processing a loan from the plan or a Qualified Domestic Relations Order, also may be charged to your account. For more information, see the Department of Labor brochure A Look at 401(k) Plan Fees at www.dol.gov/ebsa or call the Department of Labor toll free at 1.866.444.EBSA (3272). Action Item
Chapter 8: Your Benefit During A Plan Termination Or Company Merger As noted at the beginning of this booklet, employers are not required to offer a retirement plan and plans can be modified and/or terminated. What happens when a plan is terminated? What if your terminated defined benefit plan does not have enough money to
pay the benefits? What happens if a defined contribution plan is terminated? Is your accrued benefit protected if your plan merges with another plan? Special rules apply to mergers of multiemployer defined benefit plans, which generally are under the jurisdiction of the PBGC. Contact the PBGC for further information. What if your employer goes bankrupt? Significant business events such as bankruptcies, mergers, and acquisitions can result in employers abandoning their individual account plans (e.g., 401(k) plans), leaving no plan fiduciary to manage it. In this situation, participants often have great difficulty in accessing the benefits they have earned and have no one to contact with questions. Custodians such as banks, insurers, and mutual fund companies are left holding the assets of these plans but do not have the authority to terminate the plans and distribute the assets. In response, the Department of Labor issued rules to create a voluntary process for the custodian to wind up the plan’s business so that benefit distributions can be made and the plan terminated. Information about this program can be found on the Department’s Web site at www.dol.gov/ebsa. Action Items
Chapter 9: Potential Claims Against Your Benefit (Divorce) In general, your retirement plan is safe from claims by other people. Creditors to whom you owe money cannot make a claim against funds that you have in a retirement plan. For example, if you leave your employer and transfer your 401(k) account into an individual retirement account (IRA), creditors generally cannot get access to those IRA funds even if you declare bankruptcy. Federal law does make an exception for family support and the division of property at divorce. A state court can award part or all of a participant's retirement benefit to the spouse, former spouse, child, or other dependent. The recipient named in the order is called the alternate payee. The court issues a specific court order, called a domestic relations order, which can be in the form of a state court judgment, decree or order, or court approval of a property settlement agreement. The order must relate to child support, alimony, or marital property rights, and must be made under state domestic relations law. The plan administrator determines if the order is a qualified domestic relations order (QDRO) under the plan’s procedures and then notifies the participant and the alternate payee. If the participant is still employed, a QDRO can require payment to the alternate payee to begin on or after the participant’s earliest possible retirement age available under the plan. These rules apply to both defined benefit and defined contribution plans. For additional information, see EBSA’s publication, QDROs – The Division of Pensions Through Qualified Domestic Relations Orders, available by calling toll free at 1.866.444.EBSA (3272) or on the Web site at www.dol.gov/ebsa. Action Items
Chapter 10: What To Do If You Have A Problem Sometimes, retirement plan administrators, managers, and others involved with the plan make mistakes. Some examples include:
It is important for you to know that you can follow up on any possible mistakes without fear of retribution. Employers are prohibited by law from firing or disciplining employees to avoid paying a benefit, as a reprisal for exercising any of the rights provided under a plan or Federal retirement law (ERISA), or for giving information or testimony in any inquiry or proceeding related to ERISA. Start With Your Employer And/Or Plan Administrator If you find an error or have a question, in most cases, you can start by looking for information in your Summary Plan Description. In addition, you can contact your employer and/or the plan administrator and ask them to explain what has happened and/or make a correction. Is it possible to sue under ERISA?
What is the role of the Labor Department? However, not all retirement plans are covered by ERISA. For example, Federal, state, or local government plans and some church plans are not covered. The Department of Labor enforces the law by informally resolving benefit disputes, conducting investigations, and seeking correction of violations of the law, including bringing lawsuits when necessary. The Department has benefits advisors committed to providing individual assistance to participants and beneficiaries. Participants will receive information on their rights and responsibilities under the law and help in obtaining benefits to which they are entitled. Contact a benefits advisor by calling toll free at 1.866.444.EBSA (3272) or electronically at http://askebsa.dol.gov. Action Items Contact the Department of Labor’s EBSA for questions about ERISA, help obtaining a benefit, or:
What Other Federal Agencies Can Assist Participants And Beneficiaries? You may contact the PBGC at:
The Treasury Department's Internal Revenue Service is responsible for the rules that allow tax benefits for both employees and employers related to retirement plans, including vesting and distribution requirements. The IRS maintains a taxpayer assistance line for retirement plans at: 1.877.829.5500 (toll-free number). The call center is open Monday through Friday. Glossary 401(k) Plan – In this type of defined contribution plan, the employee can make contributions from his or her paycheck before taxes are taken out. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage. SIMPLE and Safe Harbor 401(k) plans have additional employer contribution and vesting requirements. Benefit Accrual – The amount of benefits accumulated under the plan. Cash Balance Plan – A type of defined benefit plan that includes some elements that are similar to a defined contribution plan because the benefit amount is computed based on a formula using contribution and earning credits, and each participant has a hypothetical account. Cash balance plans are more likely than traditional defined benefit plans to make lump sum distributions. (For more information, see Frequently Asked Questions about Cash Balance Pension Plans on the Department of Labor’s Web site, at www.dol.gov/ebsa/faqs/.) Defined Benefit Plan – This type of plan, also known as the traditional pension plan, promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors such as your salary, your age, and the number of years you worked for the employer. Defined Contribution Plan – In a defined contribution plan, the employee and/or the employer contribute to the employee’s individual account under the plan. The employee often decides how their accounts are invested. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. The contributions and earnings are not taxed until distribution. The value of the account will change based on the value and performance of the investments. Employee Retirement Income Security Act of 1974 (ERISA) – A Federal law that sets standards of protection for individuals in most voluntarily established, private-sector retirement plans. ERISA requires plans to provide participants with plan information, including important facts about plan features and funding; sets minimum standards for participation, vesting, benefit accrual, and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a claims and appeals process for participants to get benefits from their plans; gives participants the right to sue for benefits and breaches of fiduciary duty; and, if a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC). Employee Stock Ownership Plan (ESOP) – A type of defined contribution plan that is invested primarily in employer stock. Individual Benefit Statement – An individual benefit statement provides information about a participant’s retirement benefits, such as the total plan benefits earned and vested benefits, on a periodic basis. Additional information may be included depending upon the type of plan, such as how a 401(k) plan account is invested. Individual Retirement Account (IRA) – An individual account set up with a financial institution, such as a bank or a mutual fund company. Under Federal law, individuals may set aside personal savings up to a certain amount, and the investments grow, tax deferred. In addition, defined contribution plan participants can transfer money from an employer retirement plan to an IRA when leaving an employer. IRAs also can be part of an employer plan. Money Purchase Plan – A money purchase plan requires set annual contributions from the employer to individual accounts and is subject to other rules. Multiemployer Plan – A retirement plan sponsored by several employers under collective bargaining agreements that meets certain other requirements. A participant who changes jobs from one sponsoring employer to another stays within the same plan. Plan Administrator – The person who is identified in the plan document as having responsibility for running the plan. It could be the employer, a committee of employees, a company executive, or someone hired for that purpose. Plan Document – A written instrument under which the plan is established and operated. Plan Fiduciary – Anyone who exercises discretionary authority or discretionary control over management or administration of the plan, exercises any authority or control over management or disposition of plan assets, or gives investment advice for a fee or other compensation with respect to assets of the plan. Plan Trustee – Someone who has the exclusive authority and discretion to manage and control the assets of the plan. The trustee can be subject to the direction of a named fiduciary and the named fiduciary can appoint one or more investment managers for the plan’s assets. Plan Year – A 12-month period designated by a retirement plan for calculating vesting and distribution, among other things. The plan year can be the calendar year or an alternative period, e.g., July 1 to June 30. Profit-Sharing Plan – A profit-sharing plan allows the employer each year to determine how much to contribute to the plan (out of profits or otherwise) in cash or employer stock. The plan contains a formula for allocating the annual contribution among the participants. Rollover – A rollover occurs when a participant leaves an employer and directs the defined contribution plan to transfer the money in his account to a new plan or individual retirement account. This preserves the benefits and does not trigger any tax consequences if done in a timely manner . Safe Harbor 401(k) – A safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to make contributions for each employee. The employer contributions in Safe Harbor 401(k) plans are immediately 100 percent vested. The Safe Harbor 401(k) eases administrative burdens on employers by eliminating some of the complex tax rules ordinarily applied to traditional 401(k) plans. Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – A plan in which a small business with 100 or fewer employees can offer retirement benefits through employee salary reductions and matching contributions (similar to those found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE 401(k). SIMPLE IRA plans impose few administrative burdens on employers because IRAs are owned by the employees and the bank or financial institution receiving the funds does most of the paperwork. While each has some different features, including contribution limits and the availability of loans, required employer contributions are immediately 100 percent vested in both. Simplified Employee Pension Plan (SEP) – A plan in which the employer makes contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. If certain conditions are met, the employer is not subject to the reporting and disclosure requirements of most retirement plans. Under a SEP, an IRA is set up by or for an employee to accept the employer’s contributions. Summary Plan Description – A document provided by the plan administrator that includes a plain language description of important features of the plan, e.g., when employees begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when payment is received and in what form, and how to file a claim for benefits. Participants must be informed of material changes either through a revised Summary Plan Description or in a separate document called a Summary of Material Modifications. Vested Benefits – Those benefits that the individual has earned a right to receive and that cannot be forfeited. Years of Service – The time an individual has worked in a job covered by the plan. It is used to determine when an individual can participate and vest and how they can accrue benefits in the plan. |
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