A retirement plan is an arrangement that an individual sets up in order to provide themselves with an income after they retire. The most common forms of private retirement plans are 401(k) and IRA plans.
One of the main reasons for an individual to have a 401(k) or IRA is to reduce their tax liability and taxable income. This allows them to save more money long-term.
There are some large businesses that provide their employees with pensions. After an employee retires, the business will pay them a monthly amount based on the length of their employment.
What Is a Pension Plan?
A pension plan is a plan in which an employer takes some of its own funds and invests those funds on behalf of the employee. Upon the employee’s retirement, they are entitled to a specific amount of money plus whatever funds the investment earned.
The specific amount of money and the income from the investment are referred to as retirement income. Retirement income payments can be guaranteed until the end of the individual’s life.
How Does a Pension Plan Work?
When an employer sets up a pension plan, they are required to contribute to a pool of money that is set aside for retirement income. This money is invested by the employer.
An employer may invest these funds in various different types of investments, including mutual funds and stocks. Once these funds are invested, earnings on the investments accrue.
The earnings are then used to pay the employee part of their retirement income. There are some pension plans that allow employees to invest their own money in addition to the money that the employer invests.
Other pension plans match, up to a certain amount, of what an employee contributes every year.
What Does it Mean for a Retirement Plan to “Vest”?
When the retirement plan of an employee vests, then the employee can receive their retirement benefits when they leave the company. If a retirement or pension plan has only partially vested, the employee will only be able to receive the percentage that has vested.
ERISA, which will be discussed in the following section, has certain pension vesting rules. There are two basic vesting schedules, a 3 year and a 6 year.
Under the 3 year schedule, a worker becomes completely vested after 3 years of service. Under the 6 year schedule, a worker becomes 20% vested after the first 2 years of service and 20% vested after each additional 4 years.
Therefore, after six years, a worker will be completely vested. In some situations, a vesting agreement may be used.
This is an agreement between a corporation and a shareholder, typically an employee, that restricts the vesting of securities with the employee over a certain time period or subject to other conditions.
Employer-Sponsored Retirement Plans and ERISA
Although employers are not required to provide pension plans, if they choose to do so, the Employment Retirement Income Security Act (ERISA) provides rules that must be followed by private employers. ERISA regulates the vesting of employees’ rights to their retirement benefits in every employer-sponsored retirement plan.
ERISA provides standards regarding:
- When an employee begins participating in the retirement plan;
- When an employee acquires non-forfeitable rights to benefits; and
- When benefits may be affected by events, for example, termination in employment.
What Rules Apply to Retirement Benefits Vesting?
The rules that apply to an individual’s retirement benefits will often depend on the type of employer-sponsored retirement plan that they have. However, there are some ERISA vesting requirements that often apply, for example:
- Before retirement rights vest, the employee may lose some of their retirement benefits if they leave the company;
- After their rights vest, an employee who leaves before retirement gets all of their vested benefits, although the value of these vested benefits in a defined contribution plan may decline;
- Returning employees may count prior years of work towards benefits vesting, if the employee returns after less than five years;
- Military duty may be counted towards years of work necessary for vesting; and
- Different rules apply to employees who left work prior to January 1, 1985.
How Does Vesting Work in a Defined Benefit Plan?
In defined benefit plans, benefits may vest either through cliff vesting or through graduated vesting. An employer will typically have a choice as to the type of vesting schedule that is used.
In a cliff vesting arrangement, an employee will become 100% vested in their employer-funded benefits after 5 years of work. In a graduated vesting arrangement, the employer develops a schedule for the gradual vesting of the employee’s rights based on the employee’s years in service.
Pension vesting for a defined-benefit plan may occur in different ways. In some situations, employee contributions to plans vest immediately and in others, it may take as long as 7 years.
For example, the graduated vesting schedule proceeds as follows:
- In 3 years, the employee becomes at least 20% vested;
- In 4 years, the employee becomes at least 40% vested;
- In 5 years, the employee becomes at least 60% vested; and
- In 6 years, the employee becomes at least 80% vested.
After 7 years, the employee will become 100% vested. It is important to note that defined benefit plans may provide vesting schedules that are more favorable to employees.
How Does Vesting Work in a Defined Contribution Plan?
A defined contribution plan may consist of two types of contributions, including an employee’s contributions as well as contributions made by the employer. In these situations, an employer typically matches a certain percentage of the employee’s contributions to the plan.
There are different vesting schedules that apply to an employee’s contributions and the employer’s matching contributions. An employee who participates in a defined contribution plan becomes 100% vested in their own contributions immediately.
Once the employee’s contributions are vested, they cannot be forfeited. The employer’s vested contributions, however, cannot be taken out immediately.
It is important to note that under certain defined contribution plans, an employee becomes immediately bested in their employer’s contributions. In a typical defined contributions plan, however, there are two possibilities, as noted above.
This includes cliff vesting and graduated vesting. It is important to note that different vesting rules may apply depending on the specific defined contribution plan that is used in addition to the time when contributions were first made.
What Are Pension Plan Disputes?
The most common disputes related to pension plans usually arise over payments made to individuals who are retired through the pension funds involving the retiree and their former employer.
Examples of pension plan disputes that may arise include, but are not limited to:
- Disagreement over the timing or the amount of the payments from the pension plan;
- Disputes over taxes, insurance, and/or other related matters; and
- Disputes involving the denial of rightful pension benefits.
Retirement benefit disputes can also apply to pension plan disputes. This may include premature or forced retirement, which can affect an employee’s eligibility status.
A lawyer can assist the retiree with the dispute resolution process. A lawyer will have knowledge of the laws that govern pensions and retirement benefits and the laws governing property distribution and will know the best way to proceed with the case.
Seeking Help from an Employment Attorney
If you have a retirement plan that involves the investing of retirement benefits, the regulations that apply may be complexacted and your situation will likely have several nuances. If you have any issues, questions, or concerns related to your retirement benefits, it may be helpful to consult with an employment lawyer.
Your lawyer can advise you regarding your eligibility, vesting, and accrual of your retirement benefits. If you have a dispute that arises regarding your retirement plan, your attorney can advise you how to handle your complaint as well as file a lawsuit in court, if necessary.
