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FAQs About Pension Plans And ERISA What is ERISA? 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:
What are defined benefit and defined contribution
pension plans? 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. What are simplified employee pension plans
(SEPs)? 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. What are 401(k) plans? 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. What are profit sharing plans or stock bonus plans? What are employee stock ownership plans (ESOPs)? What information is your pension
plan required to disclose? 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:
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. How long do employees have to wait to become
members of a pension plan and to become vested in their benefits? 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. What protections do the fiduciary rules of ERISA
provide? 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. When must employers deposit withheld employee
contributions into a 401(k) plan or other pension plan? When can you choose your own investments? 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:
When may your plan permit you to take payment? 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. How do you make a claim for benefits? 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. When should participants expect to receive
distributions from their pension plans after terminating employment? What happens to your benefits upon death? What is 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. Can your pension be attached for family support? What requirements must be met for a domestic relations
order to be qualified? 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. Can a plan be terminated? Can I get my pension money if I am laid off? 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. Is my plan required to give me a lump-sum distribution? If I withdraw retirement money, are their potential
adverse effects? 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. If I am laid off, are my retirement funds safe? 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 Warning Signs that 401(k) Contributions are Being Misused. 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. What if the company declared bankruptcy? 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. What is the role of the U.S. Department
of Labor in
regulating pension 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. What other federal agencies regulate plans? 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:
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