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Retirement Plan Information
ERISA and Your Retirement Plan
This chapter explains the purpose of the Employee Retirement Income Security Act, what it covers, and what is excluded from its coverage. 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.
It tells which plans are exempt from the law and who administers ERISA. The following questions are addressed:
What is the Employee Retirement Income Security Act?
What retirement plans are covered by ERISA?
How does the law protect a plan’s assets?
What are SEPs, SIMPLEs, profit-sharing plans, and stock bonus plans?
What are 401(k) and ESOPs plans?
What is the role of Federal agencies?
What Is ERISA?
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.
ERISA does the following:
Requires plans to provide participants with information about the plan, including important information about plan features and funding. The plan must furnish some information regularly and automatically. Some is available free of charge, some is not.
Sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits, and to have a nonforfeitable right to those benefits. The law also establishes detailed funding rules that require plan sponsors to provide adequate funding for your plan.
Requires accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan’s management 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.
Gives participants the right to sue for benefits and breaches of fiduciary duty.
Guarantees payment of certain benefits if a defined benefit plan is terminated, through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation.
ERISA also creates standards for health plans and other employer-provided benefits, but those plans are not discussed in this booklet.
What are defined benefit and defined contribution plans?
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.
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.
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.
What are Simplified Employee Pension Plans (SEPs)?
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.
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.
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.
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.
Beginning in 1997, employers can set up another type of plan which allows salary reduction contributions, a SIMPLE IRA.
What Are Savings Incentive Match Plans for Employees of Small Employers (SIMPLE IRAs)?
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).
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.
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.
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.
When employers start these plans, they have two options for the IRAs where the contributions are deposited:
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.
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.
What are profit-sharing plans or stock bonus plans?
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.
What are 401(k) plans?
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.
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.
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.
What are employee stock ownership plans (ESOPs)?
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.
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:
Federal, State, or local government plans, including plans of certain international organizations.
Certain church or church association plans.
Plans maintained solely to comply with State workers’ compensation, unemployment compensation, or disability insurance laws.
Plans maintained outside the United States primarily for nonresident aliens.
Unfunded excess benefit plans - plans maintained solely to provide benefits or contributions in excess of those allowable for tax-qualified plans.
The Labor Department’s Employee Benefits Security Administration is the agency charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers’ benefit rights and responsibilities.
Sources of Plan
Information
Type
of Document
Who You
Can Get It From
When
You Can Get It
Your Cost
Summary Plan
Description (SPD): This summary of your retirement plan
tells you what the plan provides and how it operates.
Plan
Administrator
Upon written request
Reasonable
Charge
Automatically within 90 days
after you become covered under the plan
Free
Automatically every 5 years
if your plan is amended
Free
Automatically every 10 years
if your plan has not been amended
Free
Department
of Labor
Upon Request
Copying Charge
Summary
of Material Modifications (SMM): This summarizes material
changes to your plan.
Plan
Administrator
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)
Free
Department of Labor
Upon Request
Copying Charge
Summary Annual Report:
This summarizes the annual financial reports that most
retirement plans file with the Department of Labor.
Plan
Administrator
Automatically within 9 months
after the end of the plan year, or 2 months after the
due date for filing the annual report
Free
Annual Report (Form 5500 Series): Annual financial
reports that most retirement plans file with the Department
of Labor.
Plan
Administrator
Latest
annual report upon written request
Reasonable
Charge
Department of Labor
Upon Request
Copying Charge
Individual
Benefit Statement: A statement describing your
total accrued and vested benefits is required to be
provided by ;most retirement plans.
Plan
Administrator
Upon
written request once every 12 months
Free
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 .
Plan
Administrator
Upon
written request
Reasonable
Charge
Available for Inspection
upon request
Free
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.
Plan
Administrator
Within 2
months after the due date for filing the annual report
Free
*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.
What other Federal agencies regulate retirement plans?
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.
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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ERISA and Your
