Earning Retirement Benefits
Once you have learned what type of retirement plan your employer offers, you need to find out when you can participate in the plan and begin to earn benefits. Plan rules can vary as long as they meet the requirements under Federal law. You need to check with your plan or review the plan booklet (Summary Plan Description) to learn your plan’s rules and requirements. Your plan may require you to work for the company for a period of time before you may participate in the plan. In addition, there typically is a time frame for when you begin to accumulate benefits and earn the right to them (sometimes referred to as “vesting”).
Who can participate in
your employer’s retirement plan?
When can your
Employers have some flexibility to require additional years of service in some circumstances. For example, if your plan allows you to vest (discussed in detail later in this chapter) immediately upon participating in the plan, it may require that you work for the company for two years before you may participate in the plan.
Federal law also imposes other participation rules for certain circumstances. For example, if you were an older worker when you were hired, you cannot be excluded from participating in the plan just because you are close to retirement age.
Some 401(k) plans enroll employees automatically. This means that you will automatically become a participant in the plan unless you choose to opt out. The plan will deduct a set contribution level from your paycheck and put it into a predetermined investment. If your employer has a 401(k) plan, find out whether your plan has automatic enrollment, the date your participation begins, and where the funds are invested. Plans with automatic enrollment must provide you an opportunity once a year to change the contribution rate or to opt out of the plan. (Note: Check your plan booklet for information on when you may change your investment choices.)
When do you begin
to accumulate benefits?
Defined benefit plans often count your years of service in order to determine whether you have earned a benefit and also to calculate how much you will receive in benefits at retirement. Employees in the plan who work part-time, but who work 1,000 hours or more each year, must be credited with a portion of the benefit in proportion to what they would have earned if they were employed full time. In a defined contribution plan, your benefit accrual is the amount of contributions and earnings that have accumulated in your 401(k) or other retirement plan account, minus any fees charged to your account by your plan.
Special rules for when you begin to accumulate benefits may apply to certain types of retirement plans. For example, in a Simplified Employee Pension Plan (SEP), all participants who earn at least $450 a year from their employers are entitled to receive a contribution.
Can a plan reduce
Also, in most situations, if a company terminates a defined benefit plan that does not have enough funding to pay all of the promised benefits, the Pension Benefit Guaranty Corporation will pay plan participants and beneficiaries some retirement benefits, but possibly less than the level of benefits promised. (For more information, see the PBGC’s Web site.)
In a defined contribution plan, the employer may change the amount of employer contributions in the future. Depending on the plan terms, the employer may also be able to stop making contributions for a few years or indefinitely.
Finally, an employer may terminate a defined benefit or a defined contribution plan, but may not reduce the benefit you have already accrued in the plan.
How soon do you
have a right to your accumulated benefits?
However, you do not necessarily have an immediate right to any contributions made by your employer. Federal law provides a maximum number of years a company may require employees to work to earn the vested right to all or some of these benefits. (See tables below showing the vesting rules).
In a defined benefit plan, an employer can require that employees have 5 years of service in order to become vested in the employer funded benefits. Employers also can choose a graduated vesting schedule, which requires an employee to work 7 years in order to be 100 percent vested, but provides at least 20 percent vesting after 3 years, 40 percent after 4 years, 60 percent after 5 years, and 80 percent after 6 years of service. The permitted vesting schedules for current defined benefit plans are shown in Table 3 below. Plans may provide a different schedule as long as it is more generous than these vesting schedules.
In a defined contribution plan such as a 401(k) plan, you are always 100 percent vested in your own contributions to a plan, and in any subsequent earnings from your contributions. However, in most defined contribution plans you may have to work several years before you are vested in the employer’s matching contributions. (There are exceptions, such as the SIMPLE 401(k) and the Safe Harbor 401(k), in which you are immediately vested in all required employer contributions.)
Currently, employers have a choice of 2 different vesting schedules for employer matching 401(k) contributions, which are shown in Table 2. Your employer may use a schedule in which employees are 100 percent vested in employer contribution after 3 years of service, called cliff vesting. Under graduated vesting, an employee must be at least 20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years.
You may lose some of the employer-provided benefits you have earned if you leave your job before you have worked long enough to be vested. However, once vested, you have the right to receive the vested portion of your benefits even if you leave your job before retirement. But even though you have the right to certain benefits, your defined contribution plan account value could decrease after you leave your job as a result of investment performance.
If you leave your company and return, you may be able to count your earlier period of employment towards the years of service needed for vesting in the employer-provided benefits. Unless your break in service with the company was 5 years or the time equal to the length of your pre-break employment, whichever is greater, you likely can count that time prior to your break. Because these rules are very specific, you should read your plan document carefully if you are contemplating a short-term break from your employer, and then discuss it with your plan administrator. If you left employment prior to January 1, 1985, different rules apply. For more information, contact the Department of Labor toll free at 1.866.444.EBSA (3272).
For plans subject to collective bargaining agreements, the effective date is the earlier of the date on which the last of the collective bargaining agreements under which the plan is maintained terminates or ---
Source: U.S. Department of Labor
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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.
This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM