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Prepared by the U.S. Department of Labor
Chapter 1: ERISA and Your Pension Plan
This chapter explains the purpose of the Employee Retirement Income
Security Act, what it covers, and what is excluded from its coverage. It
tells which plans are exempt from the law and who administers it. The
following questions are addressed:
- What Is ERISA?
- What Are Defined Benefit and Defined Contribution Pension Plans?
- What Are Simplified Employee Pension Plans (SEPs)?
- What Are Profit Sharing Plans or Stock Bonus Plans?
- What Are 401(k) Plans?
- What Are Employee Stock Ownership Plans (ESOPs)?
- What Is The Role Of The Labor Department In Regulating Pension Plans?
- What Other Federal Agencies Regulate Plans?
The Employee Retirement Income Security Act of 1974 (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 nonforfeitable interest in your pension,
how long you can be away from your job before it might affect your
benefits, 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 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 nonforfeitable 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 benefit plan is terminated, through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation.
ERISA also creates standards welfare benefit plans, but those plans are
not discussed in this booklet.
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 the 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, bust
some special rules also apply. To determine what type of plan your
employer provides, check with your plan administrator or reach your
summary plan description (see p.13).
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.
Your employer may sponsor a simplified employee pension plan or SEP.
SEPs are relatively uncomplicated retirement savings vehicles. A SEP
allows employees 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 15 percent of your pay into a SEP each year, up to a maximum of
$30,000.
If you work for a company employing 25 or fewer people, your employer
may establish a salary reduction SEP. If your employer has such a plan, in
addition to any employer contributions to your SEP, you may also elect to
have SEP contributions made on your behalf from your salary on a
before-tax basis, up to the lesser of 15 percent of your pay or $9,240 in
1995. Your deferral contributions are added to any employer contributions
to determine the annual limit ($30,000 or 15% of your pay). Other limits
may apply to the amount that may be contributed on your behalf. State and
local governments and tax-exempt organizations are not eligible to
establish salary reduction SEPs.
A profit sharing or stock bonus plan is a defined contribution 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
include a 401(k) plan.
Your employer may establish a defined contribution plan that is a cash
or deferred arrangement, usually called a 401(k) plan. 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 on the amount you elect to
defer each year. The dollar limit in 1995 is $9,240. 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, if you are highly compensated,
you 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 your 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.
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 Department of Labor enforces Title I of ERISA, which, in part,
establishes participants rights and fiduciaries' duties. However, certain
plans are not covered by the protections of Title I. They are:
- Federal, state, or local government employee 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 Labor Department's Employee Benefits Security Administration is
the agency charged with enforcing the rules governing the conduct of plan
managers, investment of plan money, reporting and disclosure of plan
information, enforcement of the fiduciary provisions of the law, and
workers benefit rights. But other agencies also are involved in pension
law monitoring and enforcement. They are:
- 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 to the participants who receive pension benefits. The IRS maintains a taxpayer assistance line for employee plans at (202) 622-6074 (1:30-4:00 p.m. Eastern Time, Monday-Thursday).
- The Pension Benefit Guaranty Corporation. The 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 1200 K Street, N.W., Washington, D.C. 20005, telephone (202) 326-4000.
THE TEXT ABOVE IS PUBLIC DOMAIN MATERIAL AUTHORED BY AN AGENCY OF
THE UNITED STATES GOVERNMENT AND NOT COPYRIGHTED BY THIS WEBSITE.
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