|
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 your employer
maintains a pension plan, ERISA specifies when you must be allowed to
become a participant, how long you have to work before you have a
non-forfeitable interest in your pension, how long you can be away from
your job before it might affect your benefit, and whether your spouse has
a right to part of your pension in the event of your 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:
-
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.
-
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.
-
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.
-
Gives participants the right to sue for benefits
and breaches of fiduciary duty.
-
Guarantees payment of certain benefits if a defined
plan is terminated, through a federally chartered corporation, known
as the Pension Benefit Guaranty Corporation.
|
|
Generally speaking, there are two types of pension
plans: defined benefit plans and defined contribution plans. A
defined benefit plan promises you 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 your
average salary for the last 5 years of employment for every year of
service with your employer.
A defined contribution plan, on the other hand, does
not promise you a specific amount of benefits at retirement. In
these plans, you or your employer (or both) contribute to your individual
account under the plan, sometimes at a set rate, such as 5 percent of your
earnings annually. These contributions generally are invested on
your behalf. You will ultimately receive the balance in your
account, which is based on contributions plus or minus investment gains or
losses. The value of your account will fluctuate due to changes in
the value of your 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. To
determine what type of plan your employer provides, check with your plan
administrator or read your summary plan description.
A money purchase pension plan is a plan that requires
fixed annual contributions from your employer to your individual account.
Because a money purchase pension plan requires these regular
contributions, the plan is subject to certain funding and other rules. |
|
SEPs are relatively uncomplicated retirement savings
vehicles that allow 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, you as the employee must set up an IRA to
accept your employer's contributions. As a general rule, your
employer can contribute up to 25 percent of your 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. |
|
A 401(k) plan is a defined contribution plan
that is a cash or deferred arrangement.
You can elect to defer receiving a portion of your salary which is instead
contributed on your behalf, before taxes, to the 401(k) plan.
Sometimes the employer may match your contributions. There are
special rules governing the operation of a 401(k) plan. For example,
there is a dollar limit on the amount you may elect to defer each year.
The dollar limit is $11,000. 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 your behalf. For example, highly compensated
employees may be limited depending on the extent to which rank and
file employees participate in the plan. Your employer must advise
you of any limits that may apply to you.
Although a 401(k) plan is a retirement plan, you may be permitted access
to funds in the plan before retirement. For example, if you are an
active employee, your plan may allow you to borrow from the plan.
Also, your plan may permit you to make a withdrawal on account of
hardship, generally from the funds you contributed. The sponsor may
want to encourage participation in the plan, but it cannot make your
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. |
|
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. |
|
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. |
|
The Employee Retirement Income Security Act (ERISA) requires plan administrators - the people who run
plans - to give you in writing the most important facts you need to know
about your pension plan. Some of these facts must be provided to you
regularly and automatically by the plan administrator. Others are
available upon request, free of charge or for copying fees. Your
request should be made in writing.
One of the most important documents you are entitled to
receive automatically when you become a participant of an ERISA-covered
pension plan or a beneficiary receiving benefits under such a plan, is a
summary of the plan, called the summary plan description or SPD.
Your plan administrator is legally obligated to provide to you, free of
charge, the SPD. The SPD is an important
document that tells you what the plan provides and how it operates.
It tells you 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 should read your SPD to learn
about the particular provisions that apply to you. If a plan is
changed you must be informed, either through a revised SPD, or in a separate document, called a summary of material
modifications, which also must be given to you free of charge.
In addition to the SPD, the plan
administrator must automatically give you each year a copy of the plan's
summary annual report. This is a summary of the annual financial
report that most pension plans must file with the Department of Labor.
These reports are filed on government forms called Form 5500 or 5500-C/R.
The summary annual report 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.
If you are unable to get the SPD,
the summary annual report, or the annual report from the plan
administrator, you may be able to obtain a copy by writing to:
U.S. Department of Labor
EBSA Public Disclosure Room
200 Constitution Avenue, NW, Suite N-1513
Washington, DC 20210
Participants should include their name, address, and
telephone number to assist the Employee Benefits Security Administration (EBSA) in responding to their request. There may be a nominal copying
charge.
If you have information that plan assets are being
mismanaged or misused, send details to the EBSA office nearest where you live. |
|
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.
There are changes to the two basic vesting schedules.
Under the three-year schedule, workers are 100 percent vested after five years of
service under the plan. 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. Plans may have faster vesting schedules. |
|
ERISA protects your plan 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. |
|
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. |
|
In some defined contribution plans, a group or an
individual makes all the investment decisions for the plan's assets.
In certain defined contribution plans, however, plan officials may decide
to provide a number of investment options, and they may ask you to decide
how to invest your account balance by choosing among those investment
options.
The U.S. Department of Labor has established rules
about plans that permit participants to direct their own investments.
Under these rules, if, and only if, you truly exercise independent control
in making your investment choices, plan officials will be excused from the
fiduciary responsibility for the consequences of your investment
decisions. 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, and you cannot sue the plan officials for investment losses that
result from your decisions.
You are entitled to receive a broad range of
information about the investment choices available under a 404(c) plan.
Thus, a plan that intends to relieve plan officials of fiduciary duties
over investments must inform you of that fact. Also, a 404(c) plan
must give you sufficient information about investment options under the
plan for you to be able to make informed decisions. The information
that you are entitled to receive without asking includes the following:
-
A description of each investment option, including
the investment goals, risk and return characteristics.
-
Information about designated investment managers.
-
An explanation of when and how to make investment
instructions and any restrictions on when you can change investments.
-
A statement of the fees that may be charged to your
account when you change investment options or buy and sell
investments.
-
Information about your shareholder voting rights
and the manner in which confidentiality will be provided on how you
vote your shares of stock.
-
The name, address, and phone number of the plan
fiduciary or other person designated to provide certain additional
information on request.
|
|
ERISA provides rules governing the times at which a
pension plan may permit you to receive benefits. As these
limitations on distribution events for payment vary depending
on the type of pension plan, you should consult your summary plan
description for the specific events or times that are the conditions under
which you will be entitled to receive your benefits. After the event
occurs that permits payment of your benefit, your plan may require some
reasonable period of time during 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. The
following are a few general rules about possible distribution events for
which your plan may provide.
If your plan is a defined benefit plan or a money
purchase plan, it will set a normal retirement age, which is generally the
time at which you will be eligible to begin receiving your vested accrued
benefit. These types of plans may permit earlier payments, however,
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, it may permit you to
take some or all of your vested accrued benefit when you terminate
employment, retire, die, become disabled, reach age 59½, or if you
suffer a hardship.
If your plan is a profit-sharing plan or a stock bonus plan, your plan may
permit you 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 elapsed.
Your plan's summary plan description should describe
all of the rules applicable to any of the events that permit
distributions. |
|
Under ERISA you have a right to make a claim for
benefits due under a plan. ERISA requires all plans to have a
reasonable written procedure for processing your claims for benefits and
for appealing if your claim is denied. The summary plan description
should contain a description of your plan's procedures. If you
believe you are entitled to a benefit from a pension plan, but your plan
fails to set up a claims procedure, you may present the claim to the plan
administrator.
If you make a claim for benefits that is denied, the
plan must notify you in writing - generally within 90 days after receipt
of the claim - of the reason for the denial and the specific plan
provisions on which the denial is based. If the plan denies your
claim because the administrator needs more information to make a decision,
the administrator must tell you what information is needed. Any
notice of denial must also tell you how to file an appeal. If
special circumstances require your plan to take more time to examine your
request, it must tell you within the 90 days that additional time is
needed, why it is needed, and the date by which the plan expects to make a
final decision. If you receive no answer at all in 90 days, this is
treated the same as a denial, and you can proceed to 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, unless the plan provides for a special hearing.
If the plan notifies you that it must hold a hearing, or that it has other
special circumstances, it may have an additional 60 days.
The plan must furnish you 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 you seek relief through a
lawsuit. This is called exhausting your administrative
remedies. |
|
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 allow participants in a 401(k) plan to receive
payment of benefits after terminating employment. The
plan's Summary Plan Description (SPD) should set forth 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 before
death. The nature of the protection 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. The summary plan description will tell you the type of plan
involved and whether survivor annuities or other death benefits are
provided under the plan. |
|
In a defined benefit plan or a money purchase plan, the
form of retirement benefit payment, unless you and your spouse (if any)
choose otherwise, must be a series of equal, periodic payments over your
lifetime, with a payment continuing to your spouse for the rest of his or
her life if he or she survives you. The periodic payment to your
surviving spouse must be at least 50 percent, and 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 a timely
explanation of the QJSA, your waiver must be made in writing within
certain time limits, and your spouse must give consent to the waiver in
writing witnessed by a notary or plan representative. |
|
In general, your pension benefits cannot be taken away
from you by people to whom you 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 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. |
|
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 you are entitled to receive
your benefit. For example, if you are still employed, a QDRO could
require payment to an alternate payee to begin on or after your earliest retirement age, whether or not the plan would allow
you to receive benefits at that time. If you are in the process of a
divorce, and a QDRO is being prepared for your family, you may wish to be
sure that the QDRO addresses whether a benefit is payable to an alternate
payee upon your death and the consequences of the death of the alternate
payee. |
|
Although pension plans must be established with the
intention of being continued indefinitely, employers may 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, to the extent
then funded. 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.
However, if you are in a defined benefit plan (a plan
in which you receive a fixed, pre-established benefit) your benefits
begin at retirement age. These types of plans are less likely to
contain a provision that enables you to withdraw money early.
Whether you have a defined contribution or a defined
benefit plan, the form of your pension distribution (lump sum, annuity,
etc.) and the date your pension money will be available to you depend upon
the provisions contained in your plan documents. 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.
One of the most important documents you should have is
the Summary Plan Description (SPD). It outlines what your benefits
are and how they are calculated. A copy of the SPD is available from
your employer or pension plan administrator.
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. |
|
Yes. Receiving a lump sum or other distribution
from your pension plan may affect your ability to receive unemployment
compensation. You should check with your state unemployment office.
In addition, receiving money from your pension plan may
result in additional income tax. You can defer these taxes, however,
if you keep the money in your plan or if you roll over the
money into a qualified pension plan or Individual Retirement Account
(IRA). There are provisions in the Internal Revenue Code that allow
these rollovers. Generally, your plan is required to withhold 20 percent
of an eligible rollover distribution unless you elect to have the
distributions paid directly to an eligible retirement plan, including an
IRA. This is known as a direct rollover. If there
is no direct rollover, you will have to make up the 20 percent
withholding to avoid tax consequences on the full rollover amount.
The IRS does not require 20 percent withholding of an eligible rollover
distribution that, when added to other rollover distributions made to you
during the year, is less than $200.
Under IRS rules, and in order to avoid certain tax
consequences, you have 60 days to roll over the distribution you received
to another qualified plan or IRA if you wish to avoid the tax
consequences.
If you have a choice between leaving the money in your
current pension plan or depositing it in an IRA, you should carefully
evaluate the investments available through each option.
Withdrawing money from your retirement plan also
affects the amount of money you will accumulate over time. Your
pension keeps the full amount it earns through investments because its
earnings are not fully taxed (until you receive a distribution). As
a result, pension accounts can grow faster than comparable taxable
accounts. Say for instance that you have $10,000 in a pension
account or IRA, and it earns an average return on investment of 10
percent. In 20 years it will grow, with compounding, to $67,300.
If you withdraw this amount after you reach age 59½ (the age at which
you can withdraw money without a 10 percent penalty) and pay 28 percent
income tax on your withdrawal, you will keep $48,400. On the other hand, if you close your pension account
before age 59½, taxes will claim a portion of the funds you receive and
will reduce your return every year thereafter. As a result, the
value of your account after 20 years will be approximately $24,900,
assuming the same rate of return and tax bracket. The tax
consequences of early withdrawal will cost you 45 percent of your account
balance at retirement.
Before you withdraw retirement funds, you may want to
talk to your employer, bank, union or a financial advisor for practical
advice about the long term and the tax consequences. |
|
Generally, your pension funds should not be at risk
when a plant or business closes. Employers must comply with federal
laws when establishing and running pension plans, and the consequences of
not prudently managing pension plan assets are serious.
In addition, your pension benefits may be protected by
the federal government. Traditional plans (defined benefit plans)
are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal
government corporation. If an employer has financial difficulty and
cannot fund the plan, and the plan does not have enough money to pay the
promised benefits, the PBGC will assume responsibility as trustee of the
plan. The PBGC pays benefits up to a certain maximum guaranteed
amount. Defined contribution plans, on the other hand, are not
insured by the PBGC.
To help employees monitor their retirement plans and
thus ensure retirement security. EBSA has issued a list of ten warning
signs that may indicate your pension plan has financial problems.
They are included in the publication Protect
Your Pension: A Quick Reference Guide.
If, for any reason, you suspect your pension benefits
are not safe or are not prudently invested, you should pursue the issue
with the EBSA office
nearest you. |
|
If an employer declares bankruptcy, there are a number
of choices as to what form the bankruptcy takes. A Chapter 11
(reorganization) bankruptcy may not have any effect on your pension plan
and the plan may continue to exist. A Chapter 7 (final) bankruptcy,
where the employer's company ceases to exist, is a more complicated
matter.
Because each bankruptcy is unique, you should contact
your pension plan administrator, your union representative or the
bankruptcy trustee and request an explanation of the status of your
pension plan. |
|
The U.S. Department of Labor enforces Title I of the
Employee Retirement Income Security Act (ERISA),
which, in part, establishes participants' rights and fiduciaries' duties.
However, certain plans are not covered by the protections of Title I.
They are:
-
Federal, state, or local government plans,
including plans of certain international organizations.
-
Certain church or church association plans.
-
Plans maintained solely to comply with state
workers' compensation, unemployment compensation or disability
insurance laws.
-
Plans maintained outside the United States
primarily for non-resident aliens.
-
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
(EBSA) 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. |
|
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 toll-free taxpayer
assistance line for employee plans at 877.829.5500.
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 1.800.400.7242
|
| |
|