A pension refers to a steady income that is given to a person, usually after they retire from the workforce. Many employers set up pension plans to provide money for their employees’ retirement.
What are Employee Benefit Programs?
Employees are often eligible for a wide variety of employment benefits programs as a condition of their employment. Depending on the benefits package offered by the employer, some benefits may be fully covered by the employer while others may require a contribution from the employee.
Employer Offered Health, Medical, Dental, or Mental Health Plans
Employers that provide healthcare benefits or health insurance to employees also have certain related duties. These employers are required to provide full disclosures of plan information, timely and fair processing of benefit claims, a certificate providing evidence of health coverage under a plan, and a recovery of benefits under the plan. Employers are also required to provide the choice to temporarily continue health coverage after losing coverage (like under COBRA, below).
What is COBRA?
“COBRA” is a federal law that provides employees and their families with the right to continue their health insurance coverage for a limited time after certain events (commonly, after the loss of a job or a layoff). This law applies to employers with 20 or more employees, and allows health care coverage to be extended for up to 18 months, as long as the employee pays the cost of the coverage.
Employers are required to notify the administrator of the group health care plan within 30 days of the employee’s separation from employment. The administrator then has 14 days to notify the employee of their eligibility for coverage under COBRA.
In some cases, employers may also offer life insurance plans for employees. However, you may want to check with your employer regarding the requirements of these plans. Some only offer insurance payouts if the employee becomes deceased in the course of their employment (which can be beneficial for the family survivors, but limits payouts in other circumstances).
What are Pension Programs?
A pension refers to a regular payment made during a person’s retirement. Usually, a pension fund is created during an employee’s working years, which then provides regular payments to the employee after they retire.
What is a Defined Benefit Plan?
A defined benefit plan may be what comes to mind when you think of a “pension.” Under this type of plan, an employer promises to pay the employee a fixed amount after the employee retires (usually this is reflected in a monthly pension check from the employer during the employee’s retirement). Pension payments under this type of plan can vary depending on the formula used to calculate the payments. Usually, factors that are considered for pensions are:
- The employee’s salary;
- Years of employment;
- Age at retirement; and/or
- Other benefits depending on the plan.
Since present-day contributions must provide enough money to fund future pension benefits, the employer’s contribution amounts for defined benefit plans must be calculated by an actuary.
What is a Defined Contribution Plan?
Defined contribution plans can take many forms. Generally, the employer promises to pay a certain amount into the retirement account while the employee is working. However, the employer does not make any promises regarding the amount of income the employee can expect after retirement.
The amount of the pension would depend on economic factors and interest rates, and generally the employee has control over the investment decisions for the retirement account (both bearing the risks and reaping the benefits).
Common defined contribution plans may include IRAs or 401Ks, where you and your employer may contribute jointly to retirement savings. Contributions to pension plans may be tax deductible, while distributions that you receive from the plan may be taxed as income. If you have questions about the tax consequences of a pension plan, you should contact a qualified tax attorney or a CPA.
Who Can Participate in Employee Pension and Benefits Plans?
There may be limits to the pension and benefits plans, and you will want to make sure you have a clear explanation from your employer. Pension plans do not have to include all workers that work for an employer, but they also cannot be structured to benefit only top executives or otherwise discriminate against certain groups of employees.
For example, an employer can reserve retirement benefits solely for salaried employees but cannot specifically exclude all older workers from the plan simply because they are older.
In many cases, employees must wait a set period of time in order for their rights in the pension plan to “vest” before they can qualify for the pension program. (Vesting refers to your legal right to collect from a benefit program.) Rights usually vest when an employee has worked for five to ten years for the same employer.
Once the pension vests and the employee has the right to the retirement benefit, the employee usually has the choice whether to leave the funds in the retirement account or to withdraw the funds early.
However, it is important to know that withdrawing funds early from your retirement account can have serious tax consequences. You may want to consult an attorney or a CPA before withdrawing funds from your retirement account before you have retired.
What is the Employee Retirement Income Security Act (ERISA)?
Pension plans are generally controlled by a federal law called the Employee Retirement Income Security Act (or ERISA for short). ERISA rules set minimum standards for pension plans, with the intent of protecting employees involved in these plans. ERISA requires employers to explain and provide participating employees with information about the benefits plans.
Employers are also required to maintain and manage their health care and pension plans appropriately. Under ERISA, participating employees have the right to file claims through a grievance and appeals process if necessary. Employers who do not comply with the rules set forth under this statute can face prosecution for ERISA violations.
It is important to know, however, that ERISA does not apply to all employers. Generally, ERISA may not cover specific situations, such as group health insurance plans maintained by government entities, churches and their employees, or plans maintained outside the U.S. primarily for the benefit of nonresident aliens.
Do I Need a Lawyer for Help with Pensions and Benefits Issues?
There can be many subtle nuances when it comes to navigating your employer’s pension and benefits plans. Not only that, but employee benefit and retirement plans are heavily regulated by the federal government. A qualified workers compensation lawyer can help employers set up plans that comply with federal regulations (such as ERISA).
If you are an employee with questions regarding how your benefits work, or if you have been denied benefits that you believe are owed to you, it is in your best interests to talk to an employment lawyer. An experienced lawyer can talk you through your situation, review the documents related to your plans, and can help you figure out if you have a claim.