|
Plant and business closings,
downsizings, and reductions in hours affect
employees in numerous adverse ways. Workers lose
income, the security of a steady job and, often,
the health and retirement benefits that go along
with working full time. As a dislocated worker,
you may have many questions, some of them
concerning your health and retirement benefits.
For instance, Do I have access to my retirement
funds? What happens to my health benefits? Can I
continue health coverage until I get another job? |
![Pension and Health Care Coverage...Questions and Answers for Dislocated Workers](https://webarchive.library.unt.edu/web/20090825143400im_/http://www.dol.gov/ebsa/images/dislocatnet02.gif)
|
You may have rights to certain retirement protections
and health benefits even if you lose your job. If your
company provided a group health plan, you may be entitled
to continued health benefits for a period of time if you
cannot find a job immediately. When you find a new job,
you may have fewer barriers to health care coverage. And
with a change in employment, you should understand how
your retirement benefits are affected. Knowing your rights
can help you protect yourself and your family until you
are working full time again.
This booklet addresses some of the common questions
dislocated workers ask. In addition, there is a brief
guide to additional resources at the back. Together, they
can help you in making critical decisions about your
health care coverage and your retirement benefits.
The Employee Benefits Security Administration (EBSA)
enforces and administers the Employee Retirement Income
Security Act of 1974 (ERISA), which provides a number of
rights and protections for private-sector retirement and
health plan participants and their beneficiaries.
The Health Insurance Portability and Accountability Act
of 1996 (HIPAA) provides important protections for
millions of working Americans and their families who need
to maintain health coverage between jobs or limit
exclusions for preexisting conditions under a new health
plan.
The Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) provides workers with the right to continue
their health coverage for a limited time after they lose
their jobs.
The American Recovery and Reinvestment Act of 2009 (ARRA)
provides for premium reductions and additional election
opportunities for health benefits under COBRA for eligible
individuals.
The following questions and answers explain these laws
and how they may affect you.
One of the first questions dislocated workers ask is:
What happens to my health coverage?
HIPAA and COBRA both may provide a way to continue
coverage. Remember, you, your spouse, and your dependents
each have the right to decide among various options for
continuing health coverage. For instance, you may enroll
in your spouse’s plan while one of your dependents may
elect COBRA coverage through your former employer’s
plan.
By acquainting yourself with HIPAA and COBRA, you can
make informed decisions that will keep you and your family
covered.
HIPAA – the Health Insurance Portability and
Accountability Act of 1996 – offers protections for
people who lose their jobs and their health coverage. And,
when you find a new job that offers health benefits, HIPAA
will allow you to enroll in the plan with fewer
restrictions. The law’s umbrella of protection:
-
Provides additional opportunities to
enroll in a group health plan if you lose other
coverage or experience certain life events;
-
Limits the ability of a new employer’s
plan to exclude coverage for preexisting conditions;
-
Prohibits discrimination against
employees and their dependents based on any health
factors they may have, including prior medical
conditions, previous claims experience, and genetic
information; and
-
Guarantees that certain individuals
will have access to, and can renew, individual health
insurance policies.
For health coverage that is insured, HIPAA may be
complemented by State laws that offer additional
protections. Check your plan documents or ask your plan
administrator to see if your plan is insured. If it is,
contact your State insurance commissioner’s office to
see what your State law provides.
The following questions explain how HIPAA can help you.
I’ve lost my job. Is there any way I can get
health coverage for me and my family?
Often, the most cost-effective option for maintaining
health coverage is special enrollment. If other group
health coverage is available (for example, through a
spouse’s employer-provided plan), special enrollment in
that plan should be considered. It allows the individual
and his/her family an opportunity to enroll in a plan for
which they are otherwise eligible, regardless of
enrollment periods. However, to qualify, enrollment must
be requested within 30 days of losing eligibility for
other coverage.
After you request special enrollment due to your loss
of eligibility for other coverage, your coverage will
begin on the first day of the next month.
You and your family each have an independent right to
choose special enrollment. A description of special
enrollment rights should be included in the plan materials
you received when initially offered the opportunity to
sign up for the plan.
Special enrollment rights also arise in the event of a
marriage, birth, adoption, or placement for adoption. You
have to request enrollment within 30 days of the event. In
special enrollment as a result of birth, adoption, or
placement for adoption, coverage is retroactive to the day
of the event. In case of marriage, coverage begins on the
first day of the next month.
What coverage will I get when I take advantage of a
special enrollment opportunity?
Special enrollees must be offered the same benefits
that would be available if you were enrolling for the
first time. You cannot be required to pay more for the
same coverage or have longer preexisting condition
exclusion periods than other individuals who enrolled when
first eligible for the plan.
What is a preexisting condition exclusion period?
One of the most important things HIPAA does is help
those people with preexisting conditions get health
coverage. Under HIPAA, a plan can look back only 6 months
for a condition that was present before the start of
coverage in a group health plan. If medical advice,
diagnosis, care, or treatment was recommended or received
during that time for a condition, the plan can impose a
preexisting condition exclusion period. This means that
the condition may not be covered for a certain period of
time. However, you will still be eligible for the plan’s
other benefits.
For example, you may have had arthritis for many years
before you came to your current job. If you did not have
medical advice, diagnosis, care, or treatment –
recommended or received – in the 6 months before you
enrolled in the plan, then the prior condition cannot be
subject to an exclusion period. If you did receive medical
advice, diagnosis, care, or treatment within the past 6
months, then the plan may impose a preexisting condition
exclusion for arthritis.
However, plans cannot apply preexisting condition
exclusion periods to pregnancy, genetic information, or
conditions that are present in children who are enrolled
in health coverage within 30 days after birth, adoption,
or placement for adoption.
I have a preexisting condition that may be excluded
under HIPAA. How does my new plan determine the length of
my preexisting condition exclusion period?
The maximum length of a preexisting condition
exclusion period is 12 months after your enrollment date
(18 months if you are a late enrollee, who does not sign
up with the employer’s health plan at the first
opportunity or through special enrollment). Be aware that
some plans may have a shorter exclusion period or none at
all.
Generally, you can reduce the length of a preexisting
condition exclusion period by proving you had prior health
coverage, or “creditable coverage.” Most types of
coverage can be used as creditable coverage, such as
participation in a group health plan, HMO, COBRA,
Medicare, Medicaid, or an individual insurance policy.
The maximum preexisting condition exclusion period
under the plan is offset and can be eliminated by the
amount of your creditable coverage. As long as you do not
have a break in coverage of 63 days or more, your
creditable coverage can be used to reduce your preexisting
condition exclusion period. Any coverage you had prior to
a break of 63 days or more will not count as creditable
coverage.
For example, if you had 9 months of creditable coverage
and did not have a break in coverage of 63 days or more
before enrolling in a new plan, your preexisting condition
exclusion period would be reduced from the maximum 12
months to 3 months. If, instead, you had 15 months of
creditable coverage without a break of 63 days or more,
you could fully offset and eliminate the exclusion period.
How long can I go without coverage between jobs if I
want to reduce the length of a preexisting condition
exclusion period?
If you are between jobs and do not have health
coverage for 63 days or more, then you may lose the
ability to use the coverage you had before the break to
offset a preexisting condition exclusion period in a new
health plan.
As long as any break is no longer than 63 days, you
will not have a significant break. You can count different
periods of prior coverage you had to accumulate 12 months
of creditable coverage (18 months for late enrollees). For
instance, if you had 6 months of group health plan
coverage and a 30-day break in coverage, followed by 8
more months of coverage, both periods of prior health
coverage can be added together and counted. In this
example you would have 14 months of creditable coverage to
offset a preexisting condition exclusion period.
How can I avoid this 63-day significant break?
There are several ways. You can:
-
Special enroll in your spouse’s
group plan if it allows family members to join.
-
Sign up for COBRA continuation
coverage. You probably will have to pay for this
temporary coverage for yourself and any family members
who were part of your previous plan, but COBRA can
prevent or reduce a break in coverage. To learn more,
see the chapter on COBRA.
-
Buy an individual health insurance
policy.
-
Contact your State insurance
commissioner’s office to find out whether your State
has a high-risk pool for people who cannot otherwise
get health benefits.
How do I prove I have creditable coverage?
You can offer proof through a “certificate of
creditable coverage.” This is a document that shows your
prior periods of coverage, the dates on which they began
and ended, contact information for your old plan, and
information about your HIPAA rights. Upon losing health
coverage, you should automatically receive a certificate
from your health plan, HMO, or health insurance company.
You can also request a certificate before you lose your
coverage. HIPAA requires that health plans issue
certificates even if they do not exclude coverage for
preexisting conditions.
I received my certificate from my former plan. What
do I do now?
You should:
-
Make sure the information is
accurate. Contact the administrator of your former
plan if anything on the certificate is wrong.
-
Keep the certificate in a safe place
in case you need it. It will be necessary if your new
group health plan imposes preexisting condition
exclusion periods or if you purchase an individual
insurance policy.
What if I have trouble getting a certificate from my
(soon-to-be) former employer’s group health plan?
If you have trouble obtaining a certificate, your new
group health plan must accept other evidence of creditable
coverage, if you have it. It is important, therefore, to
keep accurate records that can be used to establish
periods of creditable coverage. That evidence can include:
-
Pay stubs that reflect a deduction
for health coverage premiums;
-
Explanation of benefits forms (EOBs);
-
Copies of premium payments or other
documents showing evidence of coverage; and
-
Verification by a doctor or your
former plan.
Can my new group health plan deny
or charge me more for coverage based on my health status?
No. A health plan cannot deny you and your family
eligibility or benefits because of certain health factors.
These health factors include: health status, physical and
mental medical conditions, claims experience, receipt of
health care, medical history, genetic information,
evidence of insurability, and disability.
The plan also cannot charge you more than similarly
situated individuals because of these health factors.
However, the plan can distinguish among employees based on
bona fide employment-based classifications, such as those
who work part time or in another geographic area, and
establish different benefits or premiums for those
different groups.
Another way to maintain health coverage between jobs is
to elect COBRA continuation coverage.
While dislocated workers may lose health coverage from
their former employer, they may have the right to continue
coverage under certain conditions. Health continuation
rules enacted under COBRA (the Consolidated Omnibus Budget
Reconciliation Act of 1985) apply to dislocated workers
and their families as well as to workers who change jobs
or workers whose work hours have been reduced, thus
causing them to lose eligibility for health coverage. This
coverage is temporary, however, and the cost may be borne
by the employee, although a temporary premium reduction
under ARRA may be available to help.
To be eligible for COBRA coverage, you must have been
enrolled in your employer’s health plan when you worked
and the health plan must continue to be in effect for
active employees. In addition, you must take steps to
enroll for COBRA continuation benefits.
Which employers are required to offer COBRA
coverage?
Employers with 20 or more employees are usually
required to offer COBRA coverage and to notify their
employees of the availability of such coverage. COBRA
applies to private-sector employees and to most State and
local government workers. In addition, many States have
laws similar to COBRA. Check with your State insurance
commissioner’s office to see if such coverage is
available to you.
What if the company closed or went bankrupt and
there is no health plan?
If there is no longer a health plan, there is no COBRA
coverage available. If, however, there is another plan
offered by the company, you may be eligible to be covered
under that plan. Union members who are covered by a
collective bargaining agreement that provides for a
medical plan also may be entitled to continued coverage.
How do I find out about COBRA coverage and how do I
elect to take it?
Employers or health plan administrators must provide
an initial general notice if you are entitled to COBRA
benefits. You probably received the initial notice about
COBRA coverage when you were hired.
When you are no longer eligible for health coverage,
your employer has to provide you with a specific notice
regarding your rights to COBRA continuation benefits. Here
is the sequence of events:
First, employers must notify their plan administrators
within 30 days after an employee’s termination or after
a reduction in hours that causes an employee to lose
health benefits.
Next, the plan administrator must provide notice to
individual employees and their covered dependents of their
right to elect COBRA coverage within 14 days after the
administrator has received notice from the employer.
Finally, you must respond to this notice and elect
COBRA coverage by the 60th day after the written notice is
sent or the day health care coverage ceased, whichever is
later. Otherwise, you will lose all rights to COBRA
benefits. Spouses and dependent children covered under
your health plan have an independent right to elect COBRA
coverage upon your termination or reduction in hours. If,
for instance, you have a family member with an illness at
the time you are laid off, that person alone can elect
coverage.
If I elect COBRA, how much do I pay?
When you were an active employee, your employer may
have paid all or part of your group health premiums. Under
COBRA, as a former employee no longer receiving benefits,
you will usually pay the entire premium – that is, the
premium that you paid as an active employee plus the
amount of the contribution made by your employer. In
addition, there may be a 2 percent administrative fee.
While COBRA rates may seem high, you will be paying
group premium rates, which are usually lower than
individual rates.
Since it is likely that there will be a lapse of a
month or more between the date of layoff and the time you
make the COBRA election decision, you may have to pay
health premiums retroactively – from the time of
separation from the company. The first premium, for
instance, will cover the entire time since your last day
of employment with your former employer.
You should also be aware that it is your responsibility
to pay for COBRA coverage even if you do not receive a
monthly statement.
Although they are not required to do so, some employers
may subsidize COBRA coverage.
Note: If you involuntarily lost your job at any time
from September 1, 2008 through December 31, 2009, you may
be eligible for a COBRA premium reduction. See the
questions below for more information.
When does COBRA coverage begin?
Once you elect coverage and pay for it, COBRA coverage
begins on the date that health care coverage ceased. It
is, essentially, retroactive. In addition, the health care
coverage you receive is the same as it is for active
employees.
How long does COBRA coverage last?
Generally, individuals who qualify initially are
covered for a maximum of 18 months, but coverage may end
earlier under certain circumstances. Those circumstances
include:
-
Premiums are not paid on time;
-
Your former employer decides to
discontinue a health plan altogether;
-
You obtain coverage with another
employer’s group health plan; (There may be some
exception if your new employer’s health plan
excludes or limits benefits for a “preexisting”
condition – basically a medical condition present
before you enrolled in the plan. Please see the
discussion of HIPAA.
-
You become entitled to Medicare
benefits.
Employers may offer longer periods of COBRA coverage
but are only required to do so under special
circumstances, such as disability (yours or a family
member’s), your death or divorce, or when your child
ceases to meet the definition of a dependent child under
the health plan.
What is the COBRA premium reduction under ARRA?
The COBRA premium reduction under ARRA is a 65 percent
reduction in COBRA premiums for periods of coverage
beginning on or after February 17, 2009 (March 1 for plans
charging for coverage on a calendar month basis). For
individuals eligible for the premium reduction, the
reduction lasts for up to 9 months or until the maximum
period for COBRA coverage ends, whichever occurs first.
Who is eligible for the COBRA premium reduction?
You and/or each member of your family are eligible for
the premium reduction if:
-
Your job is involuntarily terminated
at any time from September 1, 2008 through December
31, 2009,
-
You are eligible for COBRA coverage
as a result, and
-
You elect the COBRA coverage.
You are not eligible for the premium reduction if you
are eligible for other group health coverage (such as a
spouse’s plan) or Medicare.
Your plan administrator should provide a notice about
the premium reduction either separately or along with the
required COBRA notice.
If your employer, plan or insurer denies you the
premium reduction, you may request an expedited review
from the Department of Labor. A determination regarding
your request must be made within 15 business days after
receiving your completed application. Visit the COBRA Web
page at www.dol.gov/COBRA for the application to request
the Department’s review as well as additional
information on the COBRA premium reduction. You can file
the application online or submit it by fax or mail.
If I lost my job after September 1, 2008 and didn’t
elect COBRA when offered, or elected COBRA but had to drop
it, does ARRA help me?
If you involuntarily lost your job at any time from
September 1, 2008 through February 16, 2009 and either did
not elect COBRA or elected COBRA and are no longer
enrolled, then you are eligible for a new opportunity to
elect COBRA. Your plan administrator should have sent a
notice about this new opportunity by April 18, 2009. You
have 60 days from receipt of the notice to elect COBRA. If
you did not receive a notice, check with your plan
administrator.
Who can answer other COBRA questions?
Administration of COBRA and the COBRA provisions under
ARRA is shared by three Federal agencies. The Department
of Labor (DOL) handles questions about notification rights
for private-sector employees and requests for review of
denials of the premium reduction. The Department of Health
and Human Services (HHS) handles questions relating to
State and local government workers. The Internal Revenue
Service (IRS), as part of the Department of the Treasury,
has other COBRA jurisdiction.
More details about COBRA coverage and the COBRA
provisions under ARRA are on the dedicated COBRA Web page
at www.dol.gov/COBRA and also are included in the booklet
An Employee’s Guide to Health Benefits Under COBRA. To
receive a copy, call 1.866.444.EBSA. You can also be
connected to the EBSA office nearest you at this number.
For telephone numbers of the nearest HHS and IRS offices,
call the Federal Information Center at 1.800.688.9889 or
visit www.usa.gov.
The Trade Adjustment Assistance Act of 2002 (TAA)
created new programs that can assist certain dislocated
workers. TAA provides assistance to two groups: (1)
workers who lose their jobs due to the effects of
international trade (TAA-eligible individuals) and (2)
retirees who are receiving benefit payments from the
Pension Benefit Guaranty Corporation because it has taken
over their pension plan (PBGC-eligible individuals).
Through grants to states, TAA-eligible individuals may
be eligible for training, job search and relocation
allowances, and income support while in training. TAA
funds are allocated to states throughout the year. To
check on the status of TAA in your state, visit
www.doleta.gov/tradeact or call the Department of Labor
TAA Call Center at 1.877.US2.JOBS.
In addition, TAA created the Health Coverage Tax Credit
(HCTC), an advanceable tax credit of up to 65 percent of
the premiums paid for certain types of health insurance
coverage (including COBRA coverage). The HCTC may be
available both to TAA-eligible individuals and to PBGC-eligible
individuals who are at least 55 years old but not yet
eligible for Medicare.
Individuals who are eligible for the HCTC may choose to
have the amount of the credit paid on a monthly basis to
their health coverage provider as it becomes due or may
claim the tax credit on their income tax returns after the
end of the year.
The Trade Adjustment Assistance Health Coverage
Improvement Act of 2009, enacted as part of ARRA, made
changes to the HCTC.
The HCTC now pays a greater portion of your health
insurance. The tax credit has increased to 80 percent of
qualified health insurance premiums. The 80 percent tax
credit began with HCTC invoices in April 2009. Beginning
in August 2009, newly-enrolled participants will see a
credit on their HCTC account for qualified payments made
in 2009 while enrolling in the HCTC Program.
The HCTC will be available to your family members for a
longer period of time beginning in January 2010. Your
family may continue receiving the HCTC for up to 24 months
after you, the primary eligible individual, enroll in
Medicare, get divorced or die.
COBRA coverage also is temporarily extended for HCTC-eligible
individuals. TAA-eligible individuals can keep COBRA
coverage as long as they continue to be TAA-eligible.
PBGC-eligible individuals can retain their COBRA
coverage until death. The PBGC-eligible individual’s
spouse and dependents can keep the coverage for an
additional 24 months beyond that.
Note that the Trade Adjustment Assistance Health
Coverage Improvement Act expires on December 31, 2010. At
the time of this printing, these changes to the HCTC –
including the new timeframes for extended benefits – are
only valid through December 31, 2010.
Electing the COBRA premium reduction disqualifies you
for the HCTC. If you are eligible for the HCTC, which
could be more valuable than the premium reduction, you
will have received a notification from the IRS.
For questions about eligibility for the TAA tax credit
for qualified health insurance coverage, call the HCTC
Customer Contact Center at 1.866.628.HCTC (4282) (TDD/TTY:
1.866.626.HCTC (4282)). You may also visit the HCTC Web
site online at www.irs.gov by entering the keyword “HCTC.”
What if I cannot obtain new group
health coverage?
You can buy your own individual health insurance
policy whether you quit your job, were fired, or were laid
off. HIPAA guarantees access to individual insurance
policies and State high-risk pools for eligible
individuals. You must meet all of the following criteria:
-
Had coverage for at
least 18 months, most recently in a group health plan,
without a significant break;
-
Lost group coverage,
but not because of fraud or non-payment of premiums;
-
Are not eligible for
COBRA continuation coverage or have exhausted COBRA
benefits; and
-
Are not eligible for
coverage under another group health plan, Medicare, or
Medicaid, or have any other health coverage.
The type of health coverage you are
guaranteed may differ from State to State. Check with your
State insurance commissioner’s office if you are
interested in obtaining individual coverage.
In addition, children in families who
do not have health coverage due to a temporary reduction
in income (for instance, due to job loss) may be eligible
for the State Children’s Health Insurance Program
(S-CHIP), a Federal/State partnership that helps provide
children with health coverage.
States have flexibility in
administering S-CHIP programs. They may choose to expand
their Medicaid programs, design new child health insurance
programs, or create a combination of both. To find out
more about the program in your State, call 1.877.KIDS NOW
(1.877.543.7669) or visit www.insurekidsnow.gov on the
Web.
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 does not require that retirement
benefits be disbursed before normal retirement age,
usually age 65. By that age, an employee is usually “vested”
in a retirement plan—that is, the employee has earned
the right to retire with benefits which cannot be
forfeited.
Dislocated workers face two important
issues when they leave employment: access to retirement
funds and the continued safety of their retirement plan
investments.
Can I get my retirement money if I
am laid off?
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
allow you to receive money early.
Whether you have a defined contribution
or a defined benefit plan, the form of your retirement
plan distribution (lump sum, annuity, etc.) and the date
your benefits 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 plan administrator regarding the rules that
govern the distribution of your benefits.
One of the most important documents
defining your benefits 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 retirement plan administrator.
In addition to the SPD, your employer
also should give you—or you may request—an individual
benefit statement showing, among other things, the value
of your retirement benefits, the amount you have actually
earned to date, and your vesting status. These documents
contain important information for you, whether you receive
your money now or later.
Is my plan required to give me a
lump-sum distribution?
ERISA does not require that retirement plans provide
lump-sum distributions. Lump-sum distributions are
possible only if the plan documents specifically provide
for them.
If I withdraw money before I retire,
are there potential adverse effects?
Yes. Receiving a lump sum or other distribution from
your retirement plan may affect your ability to receive
unemployment compensation. You should check with your
State unemployment office.
In addition, withdrawing money from
your retirement 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 retirement plan or Individual Retirement Account
(IRA). There are provisions in the Internal Revenue Code
that allow these rollovers.
Generally, your plan must withhold 20
percent of an eligible rollover distribution for tax
purposes. However, in the case of a “direct rollover”
where you elect to have the distribution paid directly to
an eligible retirement plan, including an IRA, there is no
tax withholding, and the full amount of your eligible
rollover distribution is paid into the new eligible
retirement plan. If you do not elect a direct rollover,
you will have to make up the 20 percent withholding to
avoid tax consequences on the full rollover amount. The
Internal Revenue Service does not require a 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 have a choice between leaving the money in
your current retirement plan or depositing it in an IRA,
you should carefully evaluate the investments available
through each option.
Withdrawing money from your plan before
retirement age also affects the amount of money you will
accumulate over time. The graph below shows the
consequences of receiving money from your retirement plan
and not depositing it in another qualified plan within the
required time limit.
As the graph shows, if your money is
left in the plan, it grows tax free until it is
distributed, after 20 years in this example. At that
point, when the money is distributed to you, you pay taxes
on it so your account balance decreases (see lower ending
point in graph). On the other hand, if you remove your
money from the plan initially, and do not roll it over
into an IRA, then your account balance decreases during
that initial year (see lower starting point in graph), as
you pay taxes and a 10 percent penalty for withdrawing the
money before age 59½. After that, your account grows
for the next 20 years but at a lower rate of growth,
because you are paying taxes on your investment earnings.
Let's say, for instance, that you have
$10,000 in a retirement plan account or IRA. Your money is
invested in a mix of stocks and bonds that earns an
average return on investment of 6.4 percent. In 20 years,
your account will grow, with compounding, to $34,400. If
you withdraw this amount after you reach age 59½ (the
age at which you can receive money without a 10 percent
penalty) and pay 25 percent income tax on that amount, you
will keep nearly $25,800.
However, if you close your retirement
plan account before age 59½, your account balance will
decrease from $10,000 to $6,500 after paying the 10
percent penalty and 25 percent income tax. In addition,
your account grows for the next 20 years but at a lower
rate of growth, because you are paying taxes on your
investment earnings. As a result, the value of your
account after 20 years will be approximately $18,800,
assuming the same rate of return and tax bracket. As shown
in the graph, the tax consequences of early withdrawal
will cost you 27 percent of your account balance at
retirement.
Before you request retirement funds
from the plan, you should talk to your employer, bank,
union, or financial adviser for practical advice about the
long-term and tax consequences.
If you receive retirement funds, you
may want to hire someone to manage your money. The law
generally requires money managers to be clear and open
about their fees and charges and to explain whether they
are paid by commissions or for the sales of financial
products, such as annuities and mutual funds. Ask
questions, get references, and avoid anyone who guarantees
good investment performance.
If I am laid off, are my retirement
funds safe?
Generally, your retirement funds should not be at risk
even if a plant or business closes. Employers must comply
with Federal laws when establishing and running retirement
plans, and the consequences of not prudently managing plan
assets are serious.
In addition, your benefits may be
protected by the Federal government. Traditional pension
plans (defined benefit plans) are insured by the
Pension Benefit Guaranty Corporation (PBGC), a Federal
government corporation. If an employer 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.
If your retirement benefit remains with
your former employer, keep current on any changes your
former employer makes, including changes of address,
mergers, and employer name. If you move, give the plan
your new contact information.
To help employees monitor their
retirement plans and thus ensure retirement security, EBSA
has issued a list of 10 warning signs that may indicate
your plan has financial problems. They are included in the
guide Ten Warning Signs That Your 401(k) Contributions
Are Being Misused, available at www.dol.gov/ebsa.
If, for any reason, you suspect your
retirement benefits are not safe or are not prudently
invested, you should pursue the issue with an EBSA
regional office. Call 1.866.444.EBSA (3272) to be
connected to the office nearest you.
What if my company goes out of
business and the retirement plan terminates?
In a defined contribution plan, the plan administrator
generally gathers certain retirement plan and tax-related
information and submits it to the IRS. This process may
delay plan termination and subsequent payment of any
benefits. You should contact your plan administrator for
information on status and length of time before you
receive your money.
In a defined benefit plan, the plan
administrator generally files certain documents with the
IRS and the PBGC. Once the PBGC approves the termination,
benefits are generally distributed in a lump sum or as an
annuity within 1 year of termination.
Regardless of the type of benefit plan,
you should know the name of the plan administrator. This
information is contained in the latest copy of your
Summary Plan Description. If you can’t find the name of
your plan administrator, you may wish to contact your
company’s personnel department, your union
representative (if there is a union), or the IRS or PBGC
(in the case of most defined benefit plans).
If you do decide to contact one of
these agencies, you may need to know your employer’s
identification number, or EIN, a 9-digit number used for
tax purposes. The EIN can be found on last year’s wage
tax form (Form W-2). An EBSA regional office may be able
to help you obtain this information.
What if the company declares
bankruptcy?
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 retirement 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 plan administrator, your union
representative, or the bankruptcy trustee and request an
explanation of the status of your plan.
Know in advance the plan rules that
govern the way your retirement plan assets and health care
benefits are treated if you are laid off. The following
documents contain valuable information about your health
care and retirement plans and should be helpful to you as
a dislocated worker. You should be able to obtain most of
them from your plan administrator, union representative,
or human resource coordinator.
-
Summary Plan
Description
A brief description of your retirement
or health plan;
-
Summary Annual
Report
A summary of the plan’s annual finances.
The summary should contain names and addresses you may
need to know;
-
Enrollment forms
listing you and/or your family members as participants
in a plan;
-
Earnings and leave
statements;
-
Certificates of
creditable coverage (furnished by your former
employer(s))
Informs your new employer that you had
health coverage;
-
Statements showing
how much money is in your retirement plan account or
the value of your retirement benefits.
Save these documents, as well as memos
or letters from your company, union, or bank, that relate
to your retirement or health plans. They may prove
valuable in protecting your retirement and health benefit
rights.
The Employee Benefits Security
Administration offers more information on HIPAA, COBRA,
ARRA and ERISA. The following booklets, available by
calling the agency’s toll-free number, may be
particularly useful:
For copies of the above publications,
please visit www.dol.gov/ebsa
or call our toll-free number 1.866.444.EBSA (3272). If you have specific questions pertaining to your rights
to retirement or health benefits under HIPAA, COBRA, ARRA,
or ERISA, you should speak to one of our Benefit Advisors
by calling toll-free 1.8666.444.EBSA (3272) or contact us
electronically at www.askebsa.dol.gov.
Your Guaranteed Pension and
other information on terminated pension plans are
available on the Pension Benefit Guaranty Corporation Web
site at www.pbgc.gov or
call PBGC at 1.800.400.7242.
|