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On
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Few investments are more important than the one you have in
your retirement plan. Because the average American will rely
on savings for 18 years after retirement, it is essential that
you understand your rights and responsibilities under your
retirement plan.
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Participants in retirement plans have certain rights that are
governed by Federal law. They also have responsibilities.
Similarly, the people who sponsor your retirement plan also
have rights and responsibilities. Most are spelled out by a
law called the Employee Retirement Income Security Act of 1974
(ERISA). This booklet explains some of the important features
of this law.
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For example, the booklet outlines the role of different
Federal agencies in regulating plans. It describes the
obligations of your employer (or other appropriate plan
official) to provide you with information about the plan, and
tells you what information must be made available
automatically, at regular intervals, and, in many cases, at no
cost to you. It also points out the importance of keeping
informed of any changes in your plan’s rules of operation.
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This booklet tells you what is generally required to become
eligible for your plan, including how long you may have to be
an employee before becoming a participant. Important concepts
such as accruing benefits and becoming vested in your benefits
are explained. The booklet also answers common questions about
how changes in your employee status might affect your
retirement benefits, such as termination or returning to your
job after an interruption of employment. And it discusses the
potential impact on your plan of mergers, acquisitions and
plant shut downs.
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Other important features include:
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A description of your plan fiduciary’s
duties to invest your money prudently and the sanctions
against fiduciaries who misuse or mismanage your money.
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An explanation of the rules that require
your employer to adequately fund your pension plan, as
well as a description of the penalties for employers who
fail to comply with minimum funding requirements.
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Instructions on how to file a claim for a
retirement benefit and how to appeal for a review of any
denial of your claim.
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The information contained in the following pages answers the
most common questions about retirement plans. Keep in mind,
however, that this booklet is a simplified summary of
participant rights and responsibilities, not a legal
interpretation of ERISA.
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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 ERISA. The following
questions are addressed:
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What is the Employee
Retirement Income Security Act?
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What retirement plans
are covered by ERISA?
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How does the law protect
a plan’s assets?
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What are SEPs, SIMPLEs,
profit-sharing plans, and stock bonus plans?
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What are 401(k) and
ESOPs plans?
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What is the role of
Federal agencies?
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What Is ERISA?
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The Employee Retirement Income Security Act
of 1974 (ERISA) is a Federal law that sets minimum standards
for retirement plans in private industry. For example, if your
employer maintains a 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 benefit, 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
benefit in event of your death. Most of the provisions of
ERISA are effective for plan years beginning on or after
January 1, 1975.
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ERISA does not require any employer to
establish a retirement 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.
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ERISA does the following:
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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.
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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.
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Requires accountability
of plan fiduciaries. ERISA generally defines a fiduciary
as anyone who exercises discretionary authority or control
over a plan’s management of 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.
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Gives participants the
right to sue for benefits and breaches of fiduciary duty.
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Guarantees payment of
certain benefits if a defined benefit plan is terminated,
through a federally chartered corporation, known as the
Pension Benefit Guaranty Corporation.
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ERISA also creates standards for health
plans and other employer-provided benefits, but those plans
are not discussed in this booklet.
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What are defined benefit and defined
contribution plans?
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Generally speaking, there are two types of
retirement 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.
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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.
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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.
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What are Simplified Employee Pension
Plans (SEPs)?
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Your employer may sponsor a Simplified
Employee Pension Plan, or SEP. SEPs are relatively
uncomplicated retirement savings vehicles. A SEP allows
employers to make contributions on a tax-favored basis to
traditional individual retirement accounts (IRAs) owned by the
employees. SEPs are subject to minimal reporting and
disclosure requirements.
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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, or $40,000* (whichever is smaller) into a SEP each
year.
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As of January 1, 1997, employers may no
longer set up a type of SEP known as a Salary Reduction SEP.
If an employer had a Salary Reduction SEP in effect on
December 31, 1996, however, the employer may continue to allow
salary reduction contributions to the plan. These amounts are
subject to cost-of-living adjustments in future years.
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SEP participants may also be required to
earn at least $450* (for 2003) to make salary reduction
contributions. Employees are generally permitted to contribute
the lesser of $12,000 or 25 percent of compensation (up to
$200,000) in 2003. Employees 50 and older may make an
additional catch-up contribution of $2,000 in 2003. That
amount increases in $1,000 increments until the limit of
$5,000 is reached in 2006.
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Beginning in 1997, employers can set up
another type of plan which allows salary reduction
contributions, a SIMPLE IRA.
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What Are Savings Incentive Match Plans
for Employees of Small Employers (SIMPLE IRAs)?
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The SIMPLE IRA plan - savings
incentive match plan for employees of small employers -
gives businesses with 100 or fewer employees an affordable way
to offer retirement benefits through employee salary
reductions and matching contributions (similar to those found
in a 401(k) plan).
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Any employer with 100 or fewer employees
who earned $5,000 or more during the preceding calendar year
is eligible to establish a SIMPLE IRA plan. However, an
employer that currently sponsors another retirement plan
generally cannot sponsor a SIMPLE IRA plan.
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In addition, SIMPLE IRA plans can be
sponsored by most types of organizations, including
C-corporations, S-corporations, partnerships and sole
proprietorships. Related employers (businesses under common
control, for instance) are treated as a single employer.
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Eligible employees can contribute up to
$8,000 in 2003 (gradually increasing to $10,000 in 2005)
through payroll deductions. Catch-up provisions allow
employees 50 and older to make an additional $1,000
contribution in 2003, with the limit increasing $500 each year
until reaching $2,500 in 2006.
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When employers start these plans, they have
two options for the IRAs where the contributions are
deposited:
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The employer may choose
the financial institution that will receive all
contributions under the plan. In this case, employees will
have the right to transfer contributions to a SIMPLE IRA
at another financial institution without cost or penalty.
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Each employee may make
the initial choice of financial institution to receive
contributions. In this case, an employee does not have the
right to transfer to another financial institution without
cost or penalty.
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What are profit-sharing plans or stock
bonus plans?
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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.
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What are 401(k) plans?
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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 is $12,000 in 2003 with
annual increases in $1,000 increments until the limit reaches
$15,000 in 2006. 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.
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As with other types of retirement plans, a
401(k) can permit catch-up provisions for employees age 50 and
over. The catch-up amount in 2003 is $2,000 and increases in
$1,000 increments until the limit reaches $5,000 in 2006.
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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.
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What are employee stock ownership plans
(ESOPs)?
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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.
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What is the role of the Labor Department
in regulating retirement plans?
The Department of Labor enforces Title I of
ERISA, which, in part, establishes participants’ rights and
responsibilities and fiduciaries’ duties. However, certain
plans are not covered by the protections of Title I. They are:
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Federal, State, or local
government plans, including plans of certain international
organizations.
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Certain church or church
association plans.
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Plans maintained solely
to comply with State workers’ compensation, unemployment
compensation, or disability insurance laws.
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Plans maintained outside
the United States primarily for nonresident aliens.
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Unfunded excess benefit
plans - plans maintained solely to provide benefits or
contributions in excess of those allowable for
tax-qualified plans.
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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 assets, reporting and disclosure of plan information,
enforcement of the fiduciary provisions of the law, and
workers’ benefit rights and responsibilities.
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Sources of Plan
Information
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Type
of Document
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Who You
Can Get It From
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When
You Can Get It
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Your Cost
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Summary Plan
Description (SPD): This summary of your retirement plan
tells you what the plan provides and how it operates.
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Plan
Administrator
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Upon written request
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Reasonable
Charge
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Automatically within 90 days
after you become covered under the plan
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Free
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Automatically every 5 years
if your plan is amended
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Free
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Automatically every 10 years
if your plan has not been amended
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Free
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Department
of Labor
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Upon Request
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Copying Charge
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Summary
of Material Modifications (SMM): This summarizes material
changes to your plan.
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Plan
Administrator
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Automatically
within 210 days after the end of the plan year for which
the plan has been amended or modified (distribution of a
revised SPD satisfies this requirement)
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Free
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Department of Labor
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Upon Request
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Copying Charge
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Summary Annual Report:
This summarizes the annual financial reports that most
retirement plans file with the Department of Labor.
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Plan
Administrator
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Automatically within 9 months
after the end of the plan year, or 2 months after the
due date for filing the annual report
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Free
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Annual Report (Form 5500 Series): Annual financial
reports that most retirement plans file with the Department
of Labor.
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Plan
Administrator
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Latest
annual report upon written request
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Reasonable
Charge
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Department of Labor
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Upon Request
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Copying Charge
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Individual
Benefit Statement: A statement describing your
total accrued and vested benefits is required to be
provided by ;most retirement plans.
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Plan
Administrator
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Upon
written request once every 12 months
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Free
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Documents
and Instructions under which the plan is established or
operated: This includes, for example, the plan
document, collective bargaining agreement, trust
agreement, SPD, SMM, and latest annual report .
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Plan
Administrator
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Upon
written request
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Reasonable
Charge
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Available for Inspection
upon request
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Free
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Notice
to Participants in Underfunded Plans.
Generally, single-employer pension plans that are less
than 90% funded must give you notice reporting the
finding level of the plan describing the and limits on
PBGC's guarantees.
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Plan
Administrator
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Within 2
months after the due date for filing the annual report
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Free
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*Documents filed with the Labor Department
can be obtained by contacting the U.S. Department of Labor,
EBSA, Public Disclosure Facility, Room N-1513, 200
Constitution Avenue, NW, Washington, D.C. 20210, telephone:
202.693.8673.
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What other Federal agencies regulate
retirement plans?
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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” retirement plan, including
funding and vesting requirements. A plan that is “tax-qualified”
can offer special tax benefits both to the employer sponsoring
the plan and to the participants who receive retirement
benefits. The IRS maintains a toll-free taxpayer assistance
line for employee plans at 877.829.5500.
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The Pension Benefit Guaranty Corporation,
PBGC, a nonprofit, 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.
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This chapter outlines the disclosure
requirements of retirement plans. It describes the documents
that a plan administrator must make available to you, the
information these documents should contain, and alternative
sources for the information. The following questions are
addressed:
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What information does
the plan have to provide?
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What is a summary plan
description and how often should you get it?
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Where can you get annual
financial reports and other plan documents?
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What penalties can be
assessed if a plan administrator does not provide certain
documents?
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What information is your plan required
to disclose?
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ERISA requires plan administrators — the
people who run plans — to give you in writing the most
important facts you need to know about your retirement 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.
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One of the most important documents you are
entitled to receive 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
automatically when you become a participant of an ERISA-covered
retirement plan or a beneficiary receiving benefits under such
a plan . The summary plan description 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 summary
plan description to learn about the particular provisions that
apply to you. If a plan is changed you must be informed,
either through a revised summary plan description, or in a
separate document, called a summary of material modifications,
which also must be given to you free of charge.
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In addition to the summary plan
description, 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
retirement plans must file with the Department of Labor. These
reports are filed on government forms called Form 5500. 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.
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If you are unable to get the summary plan
description, the summary annual report, or the annual report
from the plan administrator, you may be able to obtain a copy
by writing to the Department of Labor, EBSA, Public Disclosure
Room, Room N-1513, 200 Constitution Avenue, N.W., Washington,
D.C. 20210, for a nominal copying charge. To help locate your
plan documents, please provide enough information to assist
EBSA in identifying the document, such as the name of the plan
and city and state in which it is located, as relevant to the
document.*
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If you have information that plan assets
are being mismanaged or misused, call EBSA’s toll free
number at 1.866.444.EBSA and ask to speak with a regional
office representative near you, or view a list of regional
offices at www.dol.gov/ebsa.
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On the following page is a list and
description of the documents that must be made available to
you. If a plan administrator refuses to comply with your
request for documents, and the reasons are within his or her
control, a court may impose a penalty of up to $110 per day.
The Department of Labor does not have the authority to impose
this penalty.
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What documents are available from other
Federal agencies?
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Documents for some plans are available for
public inspection at the Internal Revenue Service. These
documents include the applications filed by retirement plans
to determine if they meet Federal tax-qualification
requirements, applications filed by certain organizations to
determine if they qualify as tax-exempt, and the Internal
Revenue Service responses to these applications. Get in touch
with the Internal Revenue Service Public Access Reading Room,
P.O. Box 795, Ben Franklin Station, Washington, D.C. 20044,
telephone: 202.622.5164, for information on available
documents.
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If you terminate employment and you have a
vested retirement benefit that you are not eligible to receive
until later, that information will be reported by your plan to
the Internal Revenue Service, which, in turn, will inform the
Social Security Administration (SSA). This information must
also be provided to you by the plan. The Social Security
Administration will tell you, upon request, whether you were
reported as having a deferred vested benefit under any plan.
For information about making these requests, call
1.800.772.1213 (toll-free). SSA will automatically give you
this information when you apply for social security benefits.
Nevertheless, it is in your interest to keep the plan
administrator informed about any change of address or name
change after you leave employment to assure that you will
receive the retirement benefit due to you.
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This chapter describes ERISA’s rules for
eligibility, benefit accrual and vesting. It addresses the
following questions:
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What age and service
requirements may a plan impose on eligibility?
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What are accrued
benefits?
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What is vesting?
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How long may it take to
become vested?
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Will you receive any benefits from your
retirement plan if you leave employment before becoming
vested?
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Earning Service Credit
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ERISA establishes rules for how employers
must measure employees’ employment service to determine how
the eligibility, benefit accrual and vesting rules apply.
ERISA generally defines a year of service as 1,000 hours of
service during a 12-month period. Different rules apply to
counting service for purposes of eligibility, benefit accrual
and vesting.
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A plan basically has a choice among three
methods for determining whether you must be credited with a
year of service for participation, vesting and, in some
circumstances, benefit accrual: the general method of counting
service, a simplified equivalency method, or the elapsed time
method. Refer to your summary plan description to see which
method is used by your plan.
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Who must be allowed to participate in
your employer’s retirement plan?
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Generally speaking, if your employer
provides a plan that covers your position, you must be
permitted to become a participant if you have reached age 21
and have completed 1 year of service. Even if you work part
time or seasonally, you cannot be excluded from the plan on
the grounds of age or service if you meet this service
standard. You must be permitted to begin to participate in the
plan no later than the start of the next plan year or 6 months
after meeting the requirements of membership, whichever is
earlier. You should be aware, however, that your employer may
provide one or more plans covering different groups of
employees or may exclude certain categories of employees from
coverage under any plan. For example, your employer may
sponsor one plan for salaried employees and another for union
employees, or you may not be within the group that the
employer defines as covered by a plan.
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ERISA imposes certain other participation
rules. They depend on the type of employer for whom you work,
the type of plan your employer provides, and your age. For
example:
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If you were an older
worker when you were hired, you cannot be excluded from
participating in the plan on the grounds of age just
because you are close to retirement.
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If upon your entry into
the plan, your benefit will be immediately fully “vested,”
or nonforfeitable, the plan can require that you complete
2 years of service before you become eligible to
participate in the plan. 401(k) plans, however, cannot
require you to complete more than 1 year of service before
you become eligible to participate.
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If you work for a
tax-exempt educational institution and your plan benefit
becomes vested after you earn 1 year of service, the plan
can require that you be at least age 26 (instead of age
21) before you can participate in the plan.
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If your employer
maintains a SEP, you must be permitted to participate if
you have performed services for the employer in 3 of the
immediately preceding 5 years.
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What is benefit accrual and how does it
work?
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When you participate in a retirement plan,
you accrue (earn) benefits. Your accrued benefit is the amount
of benefit that has accumulated or been allocated in your name
under the plan as of a particular point in time. ERISA
generally does not set benefit levels or specify precisely how
benefits are to accumulate.
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Plans may use any definition of service for purposes of
benefit accrual as long as the definition is applied on a
reasonable and consistent basis. Service for purposes of
benefit accrual generally takes into account only the years of
service you earn after you become a plan participant, not all
service you may perform since you were hired by your employer.
Employees who work less than full-time, but at least 1,000
hours per year, must be credited with a pro rata portion of
the benefit that they would accrue if they were employed full
time.
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To illustrate: If a plan requires 2,000
hours of service for full benefit accrual, then a participant
who works 1,000 hours must be credited with at least 50
percent of the full benefit accrual.
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A special rule applies to SEPs: all
participants who earn at least $450* (in 2003) in compensation
from their employers are entitled to receive a contribution
or, if the SEP is a salary reduction SEP, to elect to make a
contribution.
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Since ERISA generally does not regulate the
amount of your benefit, you can estimate how much you are
building up only by examining the summary plan description or
the plan document. These documents should explain how you earn
service credit for full benefit accrual each plan year.
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What other rights are protected as part
of your accrued benefits?
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Your accrued benefit includes more than
just the amount of benefit you have accumulated. Your plan
provides you with various rights and options, some of which
are protected rights attached to your benefit amount. As a
general rule, protected rights cannot be reduced or
eliminated, nor can they be granted or denied at your employer’s
discretion. If a plan feature you care about has been
eliminated, this section is designed to help you determine if
it was protected or not.
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The rights that are protected include:
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Early retirement
benefit. ERISA does not require a retirement plan to
provide participants with the option to retire earlier
than at the plan’s normal retirement age. If such an
option is offered, however, a plan generally may not be
amended to eliminate the right to take such an early
retirement with respect to benefits accrued before the
amendment.
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Retirement-type
subsidy. Retirement-type subsidies are also a
protected part of your benefit and cannot be eliminated
retroactively.
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Certain important plan features are not
protected, such as a social security supplement, directing
investments, a particular form of investment, taking a loan
from a plan, or making employee contributions at a particular
rate on either a before- or after-tax basis.
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Can your plan reduce future benefits?
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ERISA does not prohibit your employer from
amending the plan to reduce the rate at which benefits accrue
in the future. For example, a plan that paid $5 in monthly
benefits at age 65 for years of service up through 2002, may
be amended to provide that years of service beginning in 2003
are credited at the rate of $4 per month.
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If you are a participant in a defined
benefit plan or a money purchase plan, you must receive
written notice of a significant reduction in the rate of
future benefit accruals after the plan amendment is adopted
and at least 15 days before the effective date of the plan
amendment. The written notice must describe the plan amendment
and its effective date.
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What happens to your service credit if
you leave your job and later return?
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A break in service can have serious
consequences for your benefit if it extends for a long enough
time and your benefit is not yet fully vested. However, ERISA
does not permit your accrued benefit to be forfeited if you
have a short break in service. ERISA establishes rules
governing the circumstances under which a plan is required to
continue to credit a participant with service earned before a
break in service if the participant later returns to
employment. These rules are very technical, but in general
guarantee your service credit cannot be forfeited for absences
shorter than 5 consecutive years. If you need to take a leave
of absence, you should carefully examine your plan’s rules
so that you do not inadvertently and unnecessarily lose
retirement benefits you have accrued.
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What happens to your benefit accruals
(and your benefit payments) if you retire and later go back to
work?
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If you continue to work past normal
retirement age (without retiring), you continue to accrue
benefits, regardless of age. However, a plan can limit the
total number of years of service that will be taken into
account for benefit accrual for anyone in the plan. If you
retire and later go back to work with your employer, you must
be allowed to continue to accrue additional benefits, subject
to any such limit on total years of service credited under the
plan.
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Plans that provide for the payment of early
retirement benefits may suspend payment of those benefits if
you are reemployed before reaching normal retirement age.
However, if the plan suspends payment of benefits before
normal retirement age, under circumstances that would not have
permitted a suspension after normal retirement age, and the
plan pays an actuarially reduced early retirement benefit, the
plan must actuarially recalculate your monthly payment when
you begin again to receive payments.
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Under certain circumstances (described
below), your benefit payments after you reach normal
retirement age may be suspended if you return to work. For
example, ERISA permits a multiemployer plan to suspend the
payment of normal retirement benefits if you return to work in
the same industry, the same trade, and the same geographical
area covered by the plan as when benefits commenced.
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Before suspending benefit payments,
however, the plan must notify you of the suspension during the
first calendar month in which the plan withholds payments. The
notification must give you the information on why benefit
payments are suspended, a general summary and a copy of the
plan’s suspension of benefit provisions, a statement
regarding the Department of Labor regulations, and information
on the plan’s procedure under which you may request a review
of the decision to suspend benefit payments. If most of this
information is contained in the plan’s summary plan
description, the notification may simply refer to the
appropriate pages of the summary plan description.
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A plan that suspends benefit payments must
advise you of its procedures for requesting an advance
determination of whether a particular type of reemployment
would result in a suspension of benefit payments. If you are a
retiree and are considering taking a job, you may wish to
write to the administrator of your plan to ask if your benefit
payments would be suspended.
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What is vesting and how does it work?
|
Vesting refers to the amount of time you
must work before earning a nonforfeitable right to your
accrued benefit. When you are fully “vested,” your accrued
benefit will be yours, even if you leave the company before
reaching retirement age. Generally, if you are employed when
you reach your plan’s “normal” retirement age (usually
65), you will be fully vested. You also must be permitted to
earn a vested right to your accrued benefit through service as
described below.
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You are always entitled to 100 percent
vesting in your own contributions and salary reduction
contributions and their investment earnings. However, if your
employer contributes to your accrued benefit (as most do), you
may be required to complete a certain number of years of
service with the employer before the employer portion of your
accrued benefit becomes vested. Thus, if you terminate
employment before working for a long enough period with your
employer, you may forfeit all or part of your accrued benefit
provided by your employer.
|
ERISA sets these standards as a minimum for
counting vesting service. Plans may provide a different
standard, as long it is more generous than these minimums.
Check your summary plan description for a description of your
employer’s vesting schedule.
|
Prior to 2002, the vesting scheduled your
employer used must have been at least as generous as one of
the two following schedule.
|
7-Year
"Graded" Vesting Schedule
|
Years
of Vesting Service Completed
|
Percentage
of Accrued Benefit Vested
|
Less than 3
|
0%
|
At least
3 but less than 4
|
20%
|
At least 4 but less than 5
|
40%
|
At least
5 but less than 6
|
60%
|
At least 6 but less than 7
|
80%
|
At least
7
|
100%
|
Years
of Vesting Service Completed
|
Percentage
of Accrued Benefit Vested
|
Less than 5
|
0%
|
At least
5
|
100%
|
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With some exceptions, once you begin
participating in a retirement plan, all of your years of
service with the employer maintaining the plan after you
reached age 18 must be taken into account to determine whether
and the extent to which your accrued benefits are vested,
including service you earned before you began to participate
in the plan and service you earned before the effective date
of ERISA.
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However, ERISA does allow plans to
disregard certain periods for purposes of determining an
employee’s vesting service. If you wish further details on
what periods of service may be disregarded, see your summary
plan description or the plan document to find out what periods
are counted in your plan.
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When you receive a benefit statement,
compare the amount of your accrued benefit with the amount or
percentage of your vested benefit to determine its accuracy.
If these items are not clear from your benefit statement, ask
your plan administrator. The plan administrator may send you a
benefit statement each year. If not, you may request a copy.
In order to keep track of your vesting service, you may want
to keep records of your hire date, the date you began
participating in the plan, and the dates of any leaves of
absence that could affect your total service.
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If the plan’s vesting schedule is changed
after you have completed at least 3 years of service, you have
the right to select the vesting schedule that existed prior to
the change for the entire length of your service, rather than
the new schedule.
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In 2002, changes to the vesting rules
speeded up the minimum vesting schedules for employer matching
contributions. There are now two alternative minimum vesting
schedules that a plan may use.
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Under the first minimum vesting schedule (“cliff”
vesting), the time period for acquiring a nonforfeitable right in employer matching contributions was shortened from 5
years to 3. This allows employees with 3 years of service to
be 100 percent vested in the employer’s matching
contributions.
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The second minimum vesting schedule (graded
vesting) was shortened by 1 year, from 7 years of service to
6. A participant has a 20-percent nonforfeitable right in the
employer matching contributions upon completion of 2 years of
service. The percentage of the nonforfeitable right increases
by 20 percent upon completion of each additional year of
service until the participant has a nonforfeitable right in
100 percent of the employer matching contributions.
|
Following is the new graded minimum vesting
schedule for employer matching contributions:
|
Years of
Vesting Service |
The Nonforfeitable
Percentage
|
2
|
20%
|
3
|
40%
|
4
|
60%
|
5
|
80%
|
6
|
100%
|
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May plans use other vesting schedules?
|
Top-heavy plans must have a faster vesting
schedule. Plans are considered “top-heavy” if they are
tax-qualified and more than 60 percent of the benefits accrue
to certain owners and officers, otherwise known as “key
employees.” This could occur, for example, in small
companies that have frequent turnover of rank-and-file
workers. In years in which a plan is top heavy, you have the
right to both faster vesting and minimum benefits, if you are
not a key employee.
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All benefits under a SEP and a SIMPLE plan
must be fully vested at all times.
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|
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This chapter outlines your rights to
payment of your benefits. The following questions are
addressed:
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As described in the previous chapter, ERISA
sets rules protecting your eligibility to participate, your
accrual of benefits, and your becoming vested under your
retirement plan. ERISA also provides a variety of rules
concerning when, as a plan participant, you may or must be
permitted to receive your benefits. This chapter describes the
payment of your benefits.
|
When can you expect payment of your
benefits?
|
ERISA provides specific rules governing
when you may, or must, begin receiving your retirement
benefits. First, ERISA sets the latest date by which the plan
must permit you to begin receiving your benefit. Under this
rule, payment must begin by the 60th day after the end of the
plan year in which the latest of the following events occur:
-
you reach age 65 or, if
earlier, the normal retirement age specified by your plan;
-
the end of the 10th year
after you began participation in the plan ends; or
-
you terminate your
service with the employer.
|
Thus, for example, your plan must provide
at a minimum that you will be entitled to begin to receive
your benefit 60 days after the end of the year in which you
reach age 65, if you began participation in the plan at least
10 years before that year.
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Your plan may allow you to receive payment
of your benefit earlier than required by the above rule (and
many plans do, subject to rules described below). However, as
long as the present value of your vested accrued benefit is
greater than $5,000, the plan cannot force you to begin
receiving your benefit before you reach the age that is
generally considered normal retirement age (or age 62 if
later).
|
If the present value of your vested accrued
benefit under the plan is $5,000 or less, the plan may require
you to receive your benefit when it first becomes
distributable, such as when you terminate employment. In
determining whether your vested accrued benefit is $5,000 or
less, the portion of your benefit that comes from amounts
rolled over from another plan is not counted.
|
When may your plan permit you to take
payment?
|
ERISA provides rules governing the times at
which a retirement plan may permit you to receive benefits. As
these limitations on “distribution events” for payment
vary depending on the type of plan, consult your summary plan
description or plan document 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:
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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
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.
|
When must you take payment?
|
ERISA also sets a date by which you must
begin to receive your benefits, regardless of your wishes or
the plan’s rules, if your plan is tax-qualified. This
mandatory beginning date is generally April 1 of the calendar
year following the calendar year in which you reach age 70½
or retire*. ERISA provides rules for determining how much of
your accrued benefit you must then receive each year.
|
In what form will your benefits be paid?
|
With some very important limits, your plan
can dictate the forms in which you may receive your accrued
benefit. The protections that ERISA provides about form of
benefit payments vary (again) depending on whether you have a
defined benefit plan, money purchase plan, or other kind of
defined contribution plan. If you are covered under a defined
benefit plan or a money purchase plan, your benefit must be
available in the form of a life annuity, which means you will
receive equal periodic payments (e.g., monthly, quarterly,
etc.) for the rest of your life. If you are married, your
benefit must be available in the form of a “qualified joint
and survivor annuity.” (That form of benefit payment is
described in the next chapter, concerning spousal rights to
benefit payments).
|
If you are covered under a defined
contribution plan that is not a money purchase plan, the plan
may choose to pay your benefits in a single lump sum payment,
or in any other form it chooses. If it offers a life annuity
option, however, and you choose that option, you and your
spouse (if any) will be protected by being offered a life
annuity or a joint and survivor annuity that satisfies the
requirements of ERISA.
|
|
|
This chapter tells you what protections
ERISA provides to your surviving spouse if your benefit was
vested upon your death. The following questions are addressed:
-
Which retirement plans
are required to offer survivor annuities?
-
What is a qualified
joint and survivor annuity?
-
What is a qualified
preretirement survivor annuity?
-
What rights does a
spouse have under your retirement plan?
-
Does your spouse have to
agree to the form of benefit payment you elect?
-
May you leave your
survivor benefit to a beneficiary other than your spouse?
|
What happens to your benefits upon
death?
|
ERISA provides some protection to surviving
spouses of deceased participants who had a vested retirement
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 benefit is scheduled to begin, otherwise
known as the annuity starting date. The summary plan
description, described in Chapter 2, will tell you the type of
plan involved and whether survivor annuities or other death
benefits are provided under the plan.
|
What is a qualified joint and survivor
annuity (QJSA)?
|
In a defined benefit plan or a money
purchase plan, the form of retirement benefit payment, unless
you and your spouse (if any) chose 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 specific 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.
|
What is a qualified preretirement
survivor annuity (QPSA)?
|
A survivor annuity must also be offered by
a defined benefit or money purchase plan if a married
participant with a vested benefit dies before he or she begins
receiving benefits. This survivor annuity is called a “qualified
preretirement survivor annuity” (QPSA). ERISA specifies how
the QPSA is calculated. You and your spouse must be given a
timely explanation of the QPSA. You may only waive the right
to a QPSA in writing, and your spouse must consent to the
waiver of the QPSA in writing, witnessed by a notary or plan
representative.
|
What survivor benefit rules apply to
most defined contribution plans (such as 401(k) plans)?
|
Most profit-sharing and stock bonus plans, like 401(k) plans,
generally need not offer a survivor annuity. However, there
are rules for such plans that protect the spouse as
beneficiary.
|
Before you begin to receive your benefits
under such a plan, your spouse is automatically presumed to be
your beneficiary. Thus, if you die before you receive your
benefits, all of your benefits will automatically go to your
surviving spouse. If you wish to select a beneficiary other
than your spouse, your spouse must consent in writing,
witnessed by a notary or plan representative. This protects
your spouse in the event of your death before any payout has
been made. When you reach a distribution date, however, such
as when you terminate employment or reach retirement, you may
choose, without your spouse’s consent, among any optional
forms of payment offered by the plan, including a life
annuity, if offered by the plan. If you choose a life annuity,
however, your spouse is then protected by QJSA rules, and the
benefit will be paid as a QJSA unless you and your spouse
consent to a different form, as outlined above.
|
Where can you get more information about
QJSA and QPSA rights?
ERISA and the Internal Revenue Code
prescribe detailed rules regarding the QJSA and QPSA rights.
You may wish to obtain from the Internal Revenue Service the
following publications on survivor annuities:
-
IRS Publication 1565 —
Looking Out for #2: A Married Couple’s Guide to
Understanding Your Benefit Choices at Retirement from a
Defined Contribution Plan;
-
IRS Publication 1566 —
Looking Out for #2: A Married Couple’s Guide to
Understanding Your Benefit Choices at Retirement from a
Defined Benefit Plan.
|
These rules reflect the law in effect for
participants who completed an hour of service (or paid leave)
on or after August 23, 1984. ERISA’s survivor annuity rules
are different if you are the surviving spouse of a participant
who left employment before that date.
|
|
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This chapter outlines how and under what
circumstances you can make a benefit claim. It tells you what
appeal procedures to follow if your claim for benefits is
denied and describes your rights to pursue a lawsuit. The
following questions are addressed:
-
How do you file a claim
for benefits?
-
What do you do if your
claim is denied?
-
May you sue the plan?
-
What are the grounds for
legal action?
|
How do you make a claim for benefits?
|
Under ERISA you have a responsibility to
file a claim for benefits due under your plan. ERISA requires
all plans to have a reasonable written procedure for
processing your claim for benefits and for appealing if your
claim is denied. The summary plan description should contain a
description of your plan’s claims procedure. If you believe
you are entitled to a benefit from a retirement plan, but your
plan fails to set up a claims procedure, you may present the
claim to the plan administrator.
|
If your claim for benefits is denied, the
plan must notify you in writing - generally within 90 days
after receipt of the claim - of the reasons 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 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 the 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, as explained below. But courts
generally require that you complete all the steps available to
you under your plan’s claims procedure in a timely manner
before you seek relief through a lawsuit. This is called “exhausting
your administrative remedies.”
|
May you sue under ERISA?
|
As a plan participant or beneficiary, you
may bring a civil action in court to:
-
Recover benefits due you
and enforce your rights under the plan.
-
Get access to plan
documents you requested in writing. If your plan
administrator does not supply the plan documents within 30
days of your written request, a court could find the plan
administrator personally liable for up to $110 per day
(unless the failure results from circumstances reasonably
beyond his or her control).
-
Clarify your right to
future benefits.
-
Get appropriate relief
from a breach of fiduciary duty.
-
Enjoin any act or
practice that violates the terms of the plan or any
provision of Title I of ERISA, such as the reporting and
disclosure, participation, vesting, funding, and fiduciary
provisions, or to obtain other equitable relief.
-
Enforce the right to
receive a statement of vested benefits upon termination of
employment.
-
Obtain review of a final
action of the Secretary of Labor, to restrain the
Secretary from taking action contrary to ERISA, or to
compel the Secretary to take action.
-
Obtain review of any
action of the PBGC or its agents that adversely affects
you.
|
You may file your lawsuit under ERISA in a
Federal district court. If you seek benefits or clarification
of your right to future benefits, you may file an alternative
suit in a State court. The court in its discretion may order
either party in the suit (you or the plan/plan
fiduciaries/plan sponsor) to pay reasonable attorney fees and
costs, when a participant or beneficiary sues under ERISA.
|
What is the role of the Department of
Labor if you sue under ERISA?
|
The Secretary of Labor may directly bring a
civil action under ERISA to enforce the fiduciary provisions
of ERISA. The Secretary also has limited authority to bring a
civil action to enforce ERISA’s participation, vesting, and
funding standards with respect to a tax-qualified plan. In
addition, the Secretary of Labor has discretion to intervene
in lawsuits filed in Federal court to enforce rights under
ERISA. A participant or beneficiary who brings an action in
Federal court claiming a breach of fiduciary duty must provide
a copy of the complaint to the Secretary of Labor and the
Secretary of the Treasury by certified mail. It is not
necessary to provide such notice to any government agency if
you bring a lawsuit solely to recover benefits under the plan.
|
May your employer fire you for asserting
your rights under ERISA?
|
ERISA prohibits employers from promising
retirement benefits and then firing or disciplining workers to
avoid paying a benefit. To that end, ERISA says it is unlawful
for an employer to discharge, fine, suspend, expel,
discipline, or discriminate against you or any beneficiary for
the purpose of interfering with the attainment of any right to
which you may become entitled under the plan or the law.
|
Also, employers cannot take any of these
steps against you for exercising any of your rights or
prospective rights under a plan or ERISA, or for giving
information or testimony in any inquiry or proceeding relating
to ERISA. Moreover, the use of force or violence to restrain,
coerce, or intimidate you for the purpose of interfering with
your rights or prospective rights is punishable by a fine of
up to $10,000 and/or up to one year in prison.
|
|
|
This chapter describes the rights and
responsibilities of the parties and the plan if a spouse,
former spouse, child or other dependent seeks a portion or all
of your retirement benefits. It addresses the following:
-
What is a Qualified
Domestic Relations Order?
-
What is an alternate
payee?
-
When can an alternate
payee receive payment under QDRO?
|
Can your retirement benefit be attached
for family support?
|
In general, your retirement 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 authority with jurisdiction over such
matters can award part or all of your 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 award can be made in a variety of forms.
|
What requirements must be met for a
domestic relations order to be qualified?
|
When a plan receives a domestic relations
order purporting to divide retirement 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 known 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 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.
|
|
|
This chapter is about the rules that
require employers to adequately fund their retirement plans.
The following questions are answered:
-
What rules govern how
employers fund plans?
-
Are there penalties for under funding
a plan?
-
Are employers subject to
sanctions if they accidentally under fund a plan?
|
What are the funding standards for
plans?
|
ERISA sets minimum funding rules to provide
that sufficient money is available to pay promised benefits to
you when you retire. Funding rules establish the minimum
amounts that employers must contribute to plans in an effort
to ensure that plans have enough money to pay benefits when
due. The rules are applicable primarily to defined benefit
plans and also to money purchase plans.
|
Defined benefit plans generally fund future
benefits over time. The plans consider probable investment
gains and losses and make assumptions about factors such as
future interest rates and potential workforce changes. ERISA
provides detailed funding rules to protect the plan from
financing methods that could prove inadequate to pay the
promised benefits when they are due.
|
ERISA provides severe sanctions against an employer who fails
to meet the funding obligations. Any employer who fails to
comply with the minimum funding requirements is charged an
excise tax on the amount of the accumulated funding
deficiency, unless the employer receives a waiver of the
minimum funding requirements. This tax is imposed whether the under funding
was accidental or intentional. Certain actions
can also be taken by the Department of Labor and the Pension
Benefit Guaranty Corporation to enforce the minimum funding
standards.
|
In the case of defined benefit plans that are less than 90
percent funded, you must be notified each year about the plan’s
funding status and PBGC’s guarantees.
|
|
|
This chapter describes what might happen to
your benefits if your employer decides to terminate or merge
your retirement plan with another plan. It covers the
following questions:
-
What happens if your
plan terminates without enough money to pay the benefits?
-
If your plan terminates
before you are vested, will you lose your benefits?
-
Under what circumstances
is your benefit guaranteed by the government?
-
Can your benefits be
reduced as the result of a merger?
|
Can a plan be terminated?
|
Although retirement plans must be
established with the intention of being continued
indefinitely, employers may terminate plans. If your plan
terminates or becomes insolvent, ERISA provides 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 a
substantial portion of plan participants, immediate 100
percent vesting, to the extent funded, also is required for
affected employees.
|
What happens if your plan terminates
without enough money to pay the benefits? Which benefits are
guaranteed?
|
If your terminated plan is a defined
benefit plan insured by the Pension Benefit Guaranty
Corporation, the PBGC will guarantee the payment of your
vested pension benefits up to the limits set by law. Benefits
that are guaranteed or that exceed PBGC’s limits may be paid
depending on the plan’s funding and on whether PBGC is able
to recover additional amounts from the employer. For further
information on plan termination guarantees, write to the
Pension Benefit Guaranty Corporation, Administrative Review
and Technical Assistance Department, 1200 K Street, N.W.,
Washington, D.C. 20005, telephone 202.326.4000.
|
If a plan terminates and the plan purchases
annuity contracts from an insurance company to pay benefits in
the future, plan fiduciaries must take certain steps to select
the safest available annuity. Thus, in accordance with
Department of Labor guidance, the plan must conduct a thorough
search with respect to the financial soundness of insurance
companies that provide annuities, to better assure the future
payment of benefits to participants and beneficiaries.
|
Is your accrued benefit protected if
your plan merges with another plan?
|
Your employer may choose to merge your plan
with another plan. If your plan is terminated as a result of
the merger, the benefit you would be entitled to receive after
the merger must be at least equal to the benefit you were
entitled to receive before the merger. Special rules apply to
mergers of multiemployer plans, which are generally under the
jurisdiction of the PBGC.
|