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focus-area/human-resources/retirement-benefits
559965141
['Retirement Benefits']

A retirement plan is an employee benefit plan established or maintained by an employer, an employee organization (such as a union), or both, that provides retirement income or defers income until termination of covered employment or beyond. A number of retirement plans are available, including the 401(k) plan and the traditional pension plan, known as a defined benefit plan. ERISA has certain requirements employee contribution plans must meet to be considered secured and protected.

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Retirement benefits

A retirement plan is an employee benefit plan established or maintained by an employer, an employee organization (such as a union), or both, that provides retirement income or defers income until termination of covered employment or beyond. A number of retirement plans are available, including the 401(k) plan and the traditional pension plan, known as a defined benefit plan.

Retirement plans

  • ERISA has certain requirements employee contribution plans must meet in order to be considered secured and protected.
  • Defined benefit plans (pension plans) and defined contribution plans (401(k)s, stock ownership, and profit-sharing plans) are qualified benefit plans under ERISA and the IRC.

Qualified plans

Qualified benefit plans offer tax-favored benefits to both employers and employees. To secure these favorable tax treatments, plans must comply with Title I of the Employee Retirement Income Security Act (ERISA) and applicable provisions of the Internal Revenue Code (IRC). Two varieties of qualified plans exist: defined benefit plans and defined contribution plans.

A defined benefit plan promises 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, one percent of average salary for the last five years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

A defined contribution plan, on the other hand, does not promise a specific number of benefits at retirement. In these plans, the employee, the employer, or both contribute to the employee’s individual account under the plan, sometimes at a set rate, such as five percent of earnings annually. These contributions generally are invested on the employee’s behalf. Employees will ultimately receive the balance in their accounts, which are based on contributions plus or minus investment gains or losses. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. Generally, the contributions and earnings are not taxed until distribution. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, employee stock ownership plans, and profit-sharing plans.

Other types of qualified plans include individual retirement accounts (IRAs), simplified employee pensions, 403(b) plans, Savings Incentive Match Plans for Employees (SIMPLE), and 457 plans. These are often used by the self-employed, employees of small companies, and tax-exempt organizations.

Traditional IRA

An ordinary individual retirement account (IRA), also called a traditional IRA, is any IRA that is not a Roth IRA or a Savings Incentive Match Plan for Employees (SIMPLE) IRA. An IRA, in general, allows a participant to deduct some or all of their contributions to the account. The contributions and earnings are not taxed until distributed. Even those who are covered by a retirement plan through their employer are able to contribute to a traditional IRA. However, all or part of the contributions may not be deductible if the plan participant or their spouse are covered by an employer-sponsored retirement plan.

In order to be eligible to contribute to an IRA, an individual must be under the age of 70½ and have taxable income such as wages, salaries, commissions, tips, bonuses, or self-employment.

Nonqualified plans

Some companies provide additional benefits to executives via nonqualified deferred compensation plans. These plans either allow participants to defer receipt of income or provide a supplemental retirement benefit beyond the limits placed on qualified plans. As such, the employee’s benefit is unsecured and not protected by ERISA or the Employee Benefit Security Administration.

Other issues

Minimum funding standards apply to certain retirement benefit plans. Other varieties of retirement benefit plans must be funded according to the terms of the governing plan document. An annual report (Form 5500) must be filed with the Internal Revenue Service (IRS) and made available for participants to inspect.

ERISA establishes certain minimum eligibility requirements for retirement benefit plans, mandating that employees cannot be excluded from participating provided they are at least 21 years old and have completed one year of service. ERISA also establishes minimum vesting requirements for retirement benefit plans.

Vesting is the process by which a retirement benefit becomes nonforfeitable; that is, when employees are permanently entitled to a portion of or all of their benefits derived from employer contributions. Two different types of vesting exist:

  • Cliff vesting is where benefits derived from employer contributions become 100 percent nonforfeitable after passage of a certain number of years.
  • Graded vesting is where the benefits derived from employer contributions become incrementally nonforfeitable over a set period of years.

403(b) Plans

A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan. The employer may also contribute to the plan for employees.

Saver’s Credit

The Internal Revenue Service (IRS) offers a special tax break called the Saver’s Credit that may be available to lower income taxpayers. By following certain guidelines outlined by the IRS, workers who contribute to a 401(k) plan, 403(b) plan, governmental 457 plan, and similar employer-sponsored retirement programs, may be eligible for this tax break.

Investment policy statement

An investment policy statement is simply a written plan to help guide the long-term investment goals for a company’s 401(k) plan. It is created to establish the guidelines for providing investment options in the plan. Participants rely on their employer’s “due diligence,” or thorough investigation, when a retirement plan vehicle is offered to help them prepare for their financial future.

Retirement plan fee disclosures and information

  • Retirement plan administrators must ensure participants and beneficiaries are aware of their rights and responsibilities for their accounts.

The investment of plan assets is a fiduciary act governed by the fiduciary standards in ERISA 404(a)(1)(A) and (B), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.

When a plan allocates investment responsibilities to participants or beneficiaries, the plan administrator must take steps to ensure that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts. The administrator must provide sufficient information regarding the plan and the plan’s investment options, including fee and expense information, to allow participants and beneficiaries to make informed decisions regarding the management of their individual accounts.

Plan-related information

The first category of information that must be disclosed is plan-related information. This general category is further divided into three subcategories as follows:

  1. General plan information
    General plan information consists of information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions under the plan, a current list of the plan’s investment options, and a description of any “brokerage window” or similar arrangement that enables the selection of investments beyond those designated by the plan.
  2. Administrative expenses information
    This information includes an explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts. Examples include fees and expenses for legal, accounting, and recordkeeping services.
  3. Individual expenses information
    An explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary based on the actions taken by that person. Examples include fees and expenses for plan loans and for processing qualified domestic relations orders.

The information in these three subcategories must be given to participants on or before the date they can first direct their investments, and then again annually thereafter.

In addition to the plan-related information that must be furnished upfront and annually, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether “administrative” or “individual”) charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These specific disclosures may be included in quarterly benefit statements required under ERISA 105.

Investment-related information

The second category of information that must be disclosed is investment-related information. This category contains several subcategories of core information about each investment option under the plan, including:

  1. Performance data
    Participants must be provided specific information about historical investment performance. One-, 5- and 10-year returns must be provided for investment options, such as mutual funds, that do not have fixed rates of return. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.
  2. Benchmark information
    For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods (matching the performance data periods) must be provided. Investment options with fixed rates of return are not subject to this requirement.
  3. Fee and expense information
    For investment options that do not a have a fixed rate of return, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment must be provided.
  4. Website address
    Investment-related information includes a website address that is sufficiently specific to provide participants and beneficiaries access to additional information about the investment options for workers who want more or updated information.
  5. Glossary
    Investment-related information includes a general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or a website address that is sufficiently specific to provide access to such a glossary.
  6. Comparative format requirement
    Investment-related information must be provided to participants or beneficiaries on or before the date they can first direct their investments, and then again annually thereafter. It also must be provided in a chart or similar format designed to facilitate a comparison of each investment option available under the plan.
  7. Miscellaneous
    Plan administrators have some protection from liability for the completeness and accuracy of information provided to participants if the plan administrator reasonably and in good faith relies upon information provided by a service provider. After participants have invested in a particular investment option, they must be provided any materials the plan receives regarding voting, tender, or similar rights in the option. Upon request, the plan administrator must also provide prospectuses, financial reports, and statements of valuation and of assets held by an investment option.

The general disclosure regulation in 29 CFR 2520.104b-1 applies to material provided under this regulation, including the safe harbor for electronic disclosures at Paragraph (C).

Automatic enrollment

  • Employers can enroll eligible employees in automatic contribution arrangements.

An automatic contribution arrangement (also known as automatic enrollment or auto enroll) is a retirement plan feature common in 401(k) plans, but can also be in one of the other plan types listed below that permit employees to make elective contributions:

  • 403(b) plans,
  • 457(b) plans of governmental employers,
  • Salary Reduction Simplified Employee Pensions (SARSEPs), and
  • Savings Incentive Match Plans for Employees (SIMPLE) individual retirement account (IRA) plans.

Automatic contribution arrangements allow employers to “enroll” eligible employees in the retirement plan automatically unless the employee affirmatively elects not to participate. “Enroll” means that the employer contributes part of the employee’s wages to the retirement plan on the employee’s behalf.

The employer automatically reduces an employee’s wages by a plan-specified default percentage and contributes that amount to the employee’s plan account as an automatic enrollment contribution. The employee may choose to:

  • Not contribute to the plan, or
  • Contribute a different amount.

Employees are always 100 percent vested (own) in their automatic enrollment contributions.

Generally, most plans deduct automatic enrollment contributions from an employee’s pre-tax wages. This means that the employees don’t pay taxes on the contributions. However, 401(k) and 403(b) plans that accept designated Roth contributions can specify that the automatic enrollment contributions are designated Roth contributions, which means they are deducted from an employee’s after-tax wages. An employer must deposit an employee’s automatic enrollment designated Roth contributions into a designated Roth account.

Bona fide profit-sharing plans or trusts and bona fide thrift savings plans

  • Bona fide profit-sharing plans or trusts and bona fide thrift or savings plans must meet certain FLSA requirements.

Bona fide profit-sharing plans

The Fair Labor Standards Act (FLSA) describes the requirements of bona fide profit-sharing plans or trusts. FLSA requires that employers include the determination of the total remuneration for a participant’s employment in the regular rate at which the participant is employed. However, it is not necessary to include any other payment to or on behalf of the employee for services performed during a given period; that payment is contributed to a bona fide profit-sharing plan or trust. (Section 7(e)(3)(b)) (29 CFR 549.0)

Section 7(e)(4) of FLSA governs the inclusion or exclusion from the regular rate of contributions made by an employer to any plan or trust (providing for old age, retirement, life, accident, or health insurance or similar benefits for employees). (29 CFR 778.214 and 778.215) However, if such a plan or trust is combined in a single program (whether in one or more documents) with a plan or trust for providing profit-sharing payments to employees, the profit-sharing payments may be excluded from the regular rate of contributions if they meet the requirements. (Section 7(e)(4)) The contributions made by the employer providing certain benefits may also be excluded from the regular rate if they meet the requirements. (Section 7 (e)(4)) (29 CFR 778.214 and 778.215)

Bona fide thrift or savings plans

FLSA also describes the requirements of bona fide thrift or savings plans. Similar to a bona fide profit-sharing plan, FLSA requires that employers include the determination of the total remuneration for a participant’s employment in the regular rate at which the participant is employed. However, it is not necessary to include any other payment to or on behalf of the employee for services performed during a given period; that payment is contributed to a bona fide thrift or savings plan. (Section 7(e)(3)(b)) (29 CFR 549.0)

Also similar to a bona fide profit-sharing plan, Section 7(e)(4) of FLSA governs the inclusion or exclusion from the regular rate of contributions made by an employer to any plan or trust (providing for old age, retirement, life, accident, or health insurance or similar benefits for employees). (29 CFR 778.214 and 778.215) However, if such a plan or trust is combined in a single program (whether in one or more documents) with a plan or trust for providing profit-sharing payments to employees, the profit-sharing payments may be excluded from the regular rate of contributions if they meet the requirements. (Section 7(e)(4)) The contributions made by the employer providing certain benefits may also be excluded from the regular rate if they meet the requirements. (Section 7 (e)(4)) (29 CFR 778.214 and 778.215) (29 CFR 549 and 778)

Defined benefit plan

  • A defined benefit plan, or pension plan, promises a specified monthly benefit at retirement.

The plan may state this promised benefit as an exact dollar amount, or it may calculate a benefit through a plan formula that considers factors like salary and service. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

Minimum Required Distribution

  • Starting at the age of 70½, individuals must take MRDs from their retirement accounts.

When participants reach age 70½, they must begin taking withdrawals from their retirement plans. This is referred to as a Minimum Required Distribution (MRD) or Required Minimum Distribution (RMD).

At this age, an MRD is necessary, and the participant must take these withdrawals from any retirement accounts that previously allowed tax-free deferrals or tax-deferred earnings. These typically include 401(k) plans, 403(b) plans, Rollover individual retirement accounts (IRAs), Savings Incentive Match Plans for Employees (SIMPLE) IRAs, Simplified Employee Pension Plan (SEP)-IRAs, Keogh plans, as well as traditional IRAs. The MRD is taxed as ordinary income at the federal income tax rate in the year in which the money is withdrawn.

Required date

The “required beginning date” for an MRD is April 1 following the year in which the individual attains age 70½. In subsequent years, the deadline is December 31.

Required amount

Amounts are based on life expectancy according to the appropriate Internal Revenue Service (IRS) life expectancy tables. A minimum amount is required, although more can always be taken if desired. If an account owner has multiple IRA accounts, the MRD must be calculated separately on each IRA each year. However, the IRA accounts may be aggregated so that the MRD may be withdrawn entirely from one account or as portions from each. Any qualified plan accounts or inherited IRAs must be calculated separately as well.

Penalty

The MRD may be withdrawn periodically throughout the year or in one lump sum distribution. If the participant fails to take an MRD at the appropriate time, one of the most severe IRS penalties will be imposed — 50 percent of the amount that should have been distributed will be forfeited.

Exceptions

There are always exceptions to every rule. For example, a Roth IRA is not subject to the MRD rules.

In addition, a person that continues to work after reaching age 70½ may not be bound by this rule in any current employer-sponsored retirement plan if the plan allows for it. Often a plan document will state that an active employee is not required to begin distributions until after termination of employment. If an account owner continues to work after age 70½ and meets the eligibility requirements, that owner can contribute to a Roth IRA. But generally, account owners cannot contribute to any other kind of IRA after reaching age 70½.

Qualified Domestic Relations Order

  • A pension plan must stipulate the distribution procedures in the event of a QDRO.

Often as a result of a divorce settlement, it is determined that all or a portion of a participant’s retirement plan benefit — whether from a defined contribution plan or a defined benefit plan — should be split and paid to the former spouse or “alternate payee.” An “alternate payee” may be a spouse, former spouse, child, or other dependent of a participant. A court order that creates the existence of an “alternate payee’s” right to receive all or a portion of the benefits payable with respect to a participant under a qualified retirement plan is referred to as a Qualified Domestic Relations Order (QDRO).

Components

Just the fact that a property settlement in a divorce situation is agreed to and signed by the parties does not necessarily cause the agreement to become a QDRO. It must be issued by a state authority, generally a court, before it qualifies. Basic information must be included in a QDRO such as names, mailing addresses of both parties, name of the plan, dollar amount or percentage to be paid to the alternate payee, and the number of payments or time period to which the order applies.

Every pension plan is required to establish written procedures for determining whether a domestic relations order is actually a QDRO and for administering distributions under it. An employer can process each QDRO in-house or pay an attorney, record keeper, or actuary to process it.

How are QDROs processed?

For employers who process the QDROs in-house, there are certain things to keep in mind:

  • Plan administrators may develop a “model” QDRO form with acceptable language to assist attorneys in the preparation of a QDRO.
  • Upon receipt of a “draft” copy of the QDRO, the plan administrator should make sure that all the information is complete and accurate. The proposed QDRO cannot require a benefit or form of benefit not otherwise provided under the plan.
  • The plan administrator must promptly notify participants and all alternate payees of the draft copy, as well as provide a copy of the plan’s procedures to them.
  • Once the plan administrator has determined the draft to be “qualified,” the approval should be sent to the attorney for final revisions and submission to the court.
  • Upon receipt of the final court order, the plan administrator is required to notify the participants and all alternate payees promptly.

Timeframe

Processing of the retirement plan benefit per the stipulations of the QDRO should be done within a reasonable time period upon receipt of the final court documentation. These are mandatory orders which a plan sponsor must abide by and should be conscientiously followed.

Employee Benefits Security Administration (EBSA)

  • EBSA enforces the provisions of ERISA by promoting voluntary compliance and facilitating self-regulation by employers.

The Employee Benefits Security Administration (EBSA) is responsible for administering and enforcing the fiduciary, reporting, and disclosure provisions of Title I of the Employee Retirement Income Security Act (ERISA) of 1974. The agency oversees approximately 700,000 pension plans and another six million health and welfare benefits plans.

The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor (DOL), were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. Since its enactment in 1974, ERISA has been amended to meet the changing retirement and health care needs of employees and their families. The role of EBSA has also evolved to meet these challenges.

The administration of ERISA is divided among the U.S. DOL, the Internal Revenue Service (IRS) of the Department of the Treasury, and the Pension Benefit Guaranty Corporation (PBGC). Title I, which contains rules for reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil enforcement, is administered by the U.S. DOL. Title II of ERISA, which amended the Internal Revenue Code (IRC) to parallel many of the Title I rules, is administered by the IRS. Title III is concerned with jurisdictional matters and coordination of enforcement and regulatory activities by the U.S. DOL and the IRS. Title IV covers the insurance of defined benefit pension plans and is administered by the PBGC.

EBSA promotes voluntary compliance and facilitates self-regulation, working to provide assistance to plan participants and beneficiaries. The department’s responsibilities under ERISA have been expanded by health care reform. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), and the Health Insurance Portability and Accountability Act of 1996 (HIPAA), gave the department broad additional responsibilities with respect to private health plans.

Employee Retirement Income Security Act (ERISA)

  • ERISA establishes standards and requirements for employer pension plans in the private sector.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that regulates pension plans and welfare benefit plans in the private industry. It pre-empts state laws that relate to employee benefit plans. For example, if organizations maintain a pension plan, ERISA specifies when employees must be allowed to become a participant, how long employees must work before earning a non-forfeitable interest in their pension, how long they can be away from their jobs before it might affect their benefits, and whether their spouses have a right to part of their pensions in the event of their deaths. Most of the provisions of ERISA are effective for plan years beginning on or after January 1, 1975.

ERISA does not require any employer to establish a pension plan. It only requires that those who do establish plans meet certain minimum standards. The law generally does not specify how much money a participant must be paid as a benefit.

Background

The goal of Title I is to protect the interests of participants and their beneficiaries in employee benefit plans. Among other things, ERISA requires that sponsors of private employee benefit plans provide participants and beneficiaries with adequate information regarding their plans. Also, individuals who manage plans (and other fiduciaries) must meet certain standards of conduct, derived from the common law of trusts and made applicable (with certain modifications) to all fiduciaries. The law also contains detailed provisions for reporting to the government and disclosure to participants. Furthermore, there are civil enforcement provisions aimed at assuring that plan funds are protected and that participants who qualify receive their benefits.

Coverage

ERISA covers pension plans and welfare benefit plans (e.g., employment based medical and hospitalization benefits, apprenticeship plans, and other plans described in Section 3(1) of Title I). Plan sponsors must design and administer their plans in accordance with ERISA. Title II of ERISA contains standards that must be met by employee pension benefit plans in order to qualify for favorable tax treatment. Noncompliance with these tax qualification requirements of ERISA may result in disqualification of a plan and/or other penalties.

Form 5500

The Internal Revenue Service (IRS), DOL, and Pension Benefit Guaranty Corporation developed the Form 5500-series returns for employee benefit plans to satisfy annual reporting requirements under ERISA and the Internal Revenue Code (IRC). Plan sponsors must generally file the return on the last day of the seventh month after their plan years end.

ERISA requirements

  • ERISA requires that plan administrators give participants adequate information about their retirement plans.

The Employee Retirement Income Security Act of 1974 (ERISA) requires employers to maintain a funding vehicle for certain plans and indicates permitted types of funding vehicles. It also places limitations on the types of personnel who can manage plans and the plan assets; and indicates when such personnel may be compensated for work on the plan.

Plan administrators must give participants certain facts in writing about their retirement and health benefit plans. These facts must include plan rules, financial information, and documents on the operation and management of the plan. Some of the facts must be provided regularly and automatically by the plan administrator. Others can be made available upon request, free-of-charge or for copying fees. The request should be made in writing.

Summary annual report (SAR)

The administrator of any employee benefit plan must each year provide a summary annual report (SAR) that confirms the requirements (except as otherwise provided in Paragraph G) of 29 CFR 2520.104b-1 to each participant of the plan and to each beneficiary receiving benefits under the plan (other than beneficiaries under a welfare plan). The administrator must provide the SAR in accordance with the requirements of 2520.104b-1.

This is a summary of the annual financial report that most plans must file with the Department of Labor (DOL) on the Form 5500. The summary annual report is provided at no cost. To learn more about the plan assets, participants may ask the plan administrator for a copy of the annual report in its entirety.

Summary plan descriptions

  • SPDs contain important information about plan participants and beneficiaries’ rights, benefits, and responsibilities.

One of the most important documents participants are entitled to receive automatically is a summary of the benefit plan, called the summary plan description (SPD). The Employee Retirement Income Security Act (ERISA) requires plan administrators to give to participants and beneficiaries an SPD describing their rights, benefits, and responsibilities under the plan in understandable language. The SPD must be provided when an employee becomes a participant of an ERISA-covered retirement or health benefit plan, or when a beneficiary receives benefits under such a plan.

The plan administrator is legally obligated to provide the SPD to participants, free of charge. The SPD tells participants what the plan provides and how it operates, including information such as:

  • The name and type of plan;
  • The plan’s requirements regarding eligibility;
  • Description of the benefits and when participants have a right to those benefits;
  • How the service and benefits are calculated;
  • When the benefits become vested;
  • Statement that the plan is maintained pursuant to a collective bargaining agreement, if applicable;
  • Statement about whether the plan is covered by termination insurance from the Pension Benefit Guaranty Corporation (PBGC);
  • Source of contributions to the plan and the methods used to calculate the amount of contributions;
  • Provisions governing termination of the plan;
  • Procedures regarding claims for benefits and remedies for disputing denied claims; and
  • Statement of rights available to plan participants under ERISA.

If a plan is changed, participants must be informed, either through a revised SPD, or in a separate document, called a summary of material modification (SMM), which also must be given to participants free of charge. The SMM must be written in a manner that the average participant can understand.

Updated SPDs must be provided every five years if changes are made to the SPD information or the plan is amended; otherwise, they must be provided every ten years. New employees must receive a copy of their plan sponsor’s latest SPD within 90 days after becoming covered by the plan. Plan sponsors are not required to file the SPD with the Department of Labor (DOL), although they are required to provide it to DOL upon request.

ERISA also requires that SPDs be updated periodically. Furthermore, ERISA requires disclosure of any material reduction in covered services or benefits to participants and beneficiaries generally within 60 days of the adoption of the change through either a revised SPD or an SMM. Material changes that do not result in a reduction in covered services or benefits must be disclosed through an SMM or a revised SPD not later than 210 days after the end of the plan year in which the change was adopted.

SPDs for health plans

Among other information, the SPD of health plans must describe the following:

  • Cost-sharing provisions including premiums, deductibles, coinsurance, and co-payment amounts for which the participant or beneficiary will be responsible;
  • Annual or lifetime caps or other limits on benefits under the plan;
  • The extent to which preventive services are covered under the plan;
  • Whether, and under what circumstances, existing and new drugs are covered under the plan;
  • Whether, and under what circumstances, coverage is provided for medical tests, devices, and procedures;
  • Provisions governing the use of network providers, the composition of provider networks and whether, and under what circumstances, coverage is provided for out-of-network services;
  • Conditions or limits on the selection of primary care providers or providers of specialty medical care;
  • Conditions or limits applicable to obtaining emergency medical care; and
  • Provisions requiring preauthorization or utilization review as a condition to obtaining a benefit or service under the plan.

The DOL website has more information on SPDs and their importance.

ERISA violations

  • EBSA conducts fiduciary or criminal violations under ERISA.

A variety of violations can occur under The Employee Retirement Income Security Act of 1974 (ERISA). Some examples of fiduciary violations include the following:

  • The failure of fiduciaries to operate the plan prudently and for the exclusive benefit of participants.
  • The use of plan assets to benefit certain related parties in interest to the plan, including the plan administrator, the plan sponsor, and parties related to these individuals.
  • The failure to properly value plan assets at their current fair market value, or to hold plan assets in trust.
  • The failure to make benefit payments, either pension or welfare, due under the terms of the plan.
  • Taking any adverse action against individuals for exercising their rights under their plans (e.g., being fired, fined, or otherwise discriminated against).
  • The failure of employers to offer continuing group health care coverage to individuals for at least 18 months after leaving that employer.

In addition to the fiduciary violations, the Employee Benefits Security Administration (EBSA) also conducts investigations of criminal violations regarding employee benefit plans such as embezzlement, kickbacks, and false statements under Title 18 of the U.S. Criminal Code. Prosecution is handled by the U.S. Attorneys’ Offices. Title 18 contains three statutes which directly address violations involving employee benefit plans:

  • Theft or Embezzlement from Employee Benefit Plan (18 USC 664),
  • False Statements or Concealment of Facts in Relation to Documents Required by the Employee Retirement Income Security Act of 1974 (18 USC 1027), and
  • Offer, Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan (18 USC 1954).

ERISA also contains the following criminal provisions:

  • 29 USC 411, Prohibition Against Certain Persons Holding Certain Positions;
  • 501, Willful Violation of Title I, Part 1; and
  • 511, Coercive Interference.

Persons convicted of violations enumerated in 411 are subject to a bar from holding plan positions or providing services to plans for up to 13 years.

Decisions to seek criminal action turn on a number of factors, including:

  • The egregiousness and magnitude of the violation,
  • The desirability and likelihood of incarceration both as a deterrent and as a punishment, or
  • Whether the case involves a prior ERISA violator.

Pension Benefits Guaranty Corporation (PBGC)

  • The role of the PBGC is to protect retirees’ income and benefits.

The Pension Benefits Guaranty Corporation (PBGC) is a federal corporation created by the Employee Retirement Income Security Act of 1974 (ERISA). It was created to:

  • Encourage the growth of defined benefit pension plans,
  • Provide timely and uninterrupted payment of pension benefits, and
  • Keep pension insurance premiums at a minimum.

PBGC protects the retirement incomes of nearly 44.3 million American workers in more than 31,000 private defined benefit pension plans. It is not funded by general tax revenues; PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments, and receives funds from pension plans it takes over.

PBGC pays monthly retirement benefits, up to a guaranteed maximum, to retirees in thousands of pension plans that terminated. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of over 1 million former employees. An employer can voluntarily ask to close its single employer pension plan in either a standard or distress termination.

In a standard termination, the plan must have enough money to pay all benefits, whether vested or not, before the plan can end. After workers receive promised benefits, in the form of a lump sum payment or an insurance company annuity, PBGC’s guarantee ends. In a distress termination, where the plan does not have enough money to pay all benefits, the employer must prove severe financial distress, such as the likelihood that continuing the plan would force the company to shut down. PBGC will pay guaranteed benefits, usually covering a large part of total earned benefits, and make strong efforts to recover funds from the employer.

In addition, PBGC may seek to close a single-employer plan without the employer’s consent to protect the interests of workers, the plan, or PBGC’s insurance fund. PBGC must act to terminate a plan that cannot pay current benefits. For multiemployer pension plans that are unable to pay guaranteed benefits when due, PBGC will provide financial assistance to the plan, usually a loan, so that retirees continue receiving their benefits.

Pension Protection Act (PPA)

  • The PPA includes retirement plan provisions related to vesting, hardship distributions, and automatic enrollment.

Pension Protection Act

The Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006. It includes a number of significant tax incentives to enhance retirement savings for many Americans. Some of the retirement-related provisions include the following:

  • Permanent retirement and savings incentives – The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) substantially increased pension and individual retirement account (IRA) contribution limits through 2010 as well as made other improvements in pensions and retirement savings through enhanced vesting, portability, and reduced regulatory burdens. The law made these changes permanent.
  • Vesting – All employer contributions made to a defined contribution plan must be vested using either a six-year graded or a three-year cliff vesting schedule.
  • Notice and consent period regarding distributions – A notice must be provided to plan participants at least 30 days but not more than 180 days before a distribution stating the participant’s rights regarding cash-outs (explaining the consequences of not deferring the distribution), eligible rollover distributions, and survivor annuities.
  • Saver’s Credit made permanent – The law made permanent the Saver’s Credit of up to $2,000.
  • Requirement to allow employees to divest plan assets – The law requires employers to allow participants in defined contribution plans that are invested in employer securities to elect to direct the plan to divest the employer securities into other investment options. Participants are required to be notified of their right to divest and of the importance of diversification.
  • Hardship distributions – This provision modifies the rules governing hardship to include events that occur to a participant’s spouse or dependent.
  • Treatment of individual retirement account (IRA) contributions for Guard and Reservists called to active duty – The law provides that distributions from an IRA or pension plan taken by members of the National Guard and Army Reserve called to active duty between 9/11/2001 and 12/31/2007 for a period in excess of 179 days are not subject to early withdrawal penalties. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limit.
  • Rollover rules – The law provides new rollover requirements for after-tax rollovers in annuity contracts, direct rollovers from retirement plans to Roth IRAs, and rollovers by nonspouse beneficiaries of certain retirement plan distributions.
  • In-service distributions at age 62 – The law allows pension plans to provide for distributions to employees who have attained age 62 and have not separated from employment at the time of the distributions.
  • Automatic enrollment – The law creates a safe harbor to encourage employers to offer automatic enrollment in defined contribution pension plans.
  • Combined defined benefit and defined contribution plan – The law creates a new type of plan for small employers (with no more than 500 employees) consisting of a combination defined benefit plan and defined contribution plan where the assets are held in a single trust.

Restricted stock

  • Restricted stock is a form of employee benefit usually offered to company executives.
  • Restricted stocks are not taxed until the stock vests, which will not happen until the restrictions lapse (usually within three to five years).

Restricted stock is generally awarded to a select number of top executives in a company. It is simply a grant of a number of shares of company stock with certain limitations on it. If the employee leaves the company before the stock vests, their shares are forfeited. The important details to remember in a restricted stock grant are the number of shares and when it is received.

Vesting

Once the restrictions lapse, the shares become vested. Typical restriction periods are three to five years; however, they can be more or less than this. Some grants vest all at once and others are subject to vest in tiers (i.e., one-third of the shares will vest each year for three years). The employee receives the full value of the shares at the time of vesting, not just the gain since the date of the award.

Vesting can be determined in three ways:

  • At a specified date (time-based),
  • When a performance target is met (performance-based), or
  • When a performance target is met by a certain date (a combination of both ways mentioned above).

Taxation

Restricted stock is generally not taxed until the stock vests. At that time, the stock is treated as ordinary income to the employee. There is, however, an option available to participants called an “83(b) election.” If this election is made within 30 days of the grant date, then the participant may pay the tax at the time the shares are issued instead of when they vest. Any increase in the stock’s value can then be taxed at the lower capital gains rate. This method is not used frequently. However, if the participant believes there is great upside potential, then it may be worthwhile.

Besides having to come up with the money to pay the taxes in advance, another major drawback to this election is that the participant risks the chance of paying the IRS for income never received. Should participants leave the company and forfeit the stock prior to vesting, they are not entitled to any refund of taxes previously paid.

Ownership

Once the grant is made, employees own the stock outright. They can vote the stock and receive dividends. As a recruitment and retention tool, restricted stock can be of value to an organization. The employee can never lose because the share price never falls below zero, and the company uses the grant as a “golden handcuff.”

Restricted stock vs. stock option

Restricted stock usually retains some value — unlike a stock option, which can become useless if the stock price falls below the strike price (the price on the date it was granted). Employees may be awarded fewer shares of restricted stock than stock options, but they are much less risky. In addition, the immediate ownership rights of those holding restricted stock are not given to those who have been granted stock options. Until the options are vested and purchased by the employee, the employee does not have ownership rights to the stock.

While some companies have already reduced equity-based compensation over the last few years, the movement is accelerating because of an accounting rule that requires companies to count stock options as expenses. These are a few of the major differences between the two types of long-term incentive awards being used by companies.

401(k) loans

  • Employees can borrow loans from their 401(k) account balance.

Employees’ 401(k) plans may allow them to borrow from their account balances. However, employees should consider a few things before taking a loan from their 401(k)s.

If the employee doesn’t repay the loan, including interest, according to the loan’s terms, any unpaid amounts become a plan distribution to them. The plan may even require employees to repay the loan in full if they leave their jobs.

Generally, employees have to include any previously untaxed amounts of the distribution in their gross incomes in the year in which the distributions occur. An employee may also have to pay an additional 10 percent tax on the amount of the taxable distribution, unless the employee:

  • Is at least age 59 ½, or
  • Qualifies for another exception.

Any unpaid loan amount also means the employee will have less money saved for retirement.

Supplemental Executive Retirement Plan (SERP)

What is a SERP?

A supplemental executive retirement plan (SERP) is a deferred compensation agreement between the company and the key executive whereby if the executive meets certain pre-agreed eligibility and vesting conditions, the company agrees to provide supplemental retirement income to the executive and the executive’s family.

The plan is funded by the company out of cash flows, investment funds, or cash value life insurance. Any deferred benefits are not currently taxable to the key executive. When paid, the benefits become taxable to the executive as income and tax deductible to the company. A typical example of a plan would provide the executive a retirement benefit from all employer provided retirement benefit plans equal to 70 percent of the executives high three-year average compensation.

Retirement plans

  • ERISA has certain requirements employee contribution plans must meet in order to be considered secured and protected.
  • Defined benefit plans (pension plans) and defined contribution plans (401(k)s, stock ownership, and profit-sharing plans) are qualified benefit plans under ERISA and the IRC.

Qualified plans

Qualified benefit plans offer tax-favored benefits to both employers and employees. To secure these favorable tax treatments, plans must comply with Title I of the Employee Retirement Income Security Act (ERISA) and applicable provisions of the Internal Revenue Code (IRC). Two varieties of qualified plans exist: defined benefit plans and defined contribution plans.

A defined benefit plan promises 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, one percent of average salary for the last five years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

A defined contribution plan, on the other hand, does not promise a specific number of benefits at retirement. In these plans, the employee, the employer, or both contribute to the employee’s individual account under the plan, sometimes at a set rate, such as five percent of earnings annually. These contributions generally are invested on the employee’s behalf. Employees will ultimately receive the balance in their accounts, which are based on contributions plus or minus investment gains or losses. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. Generally, the contributions and earnings are not taxed until distribution. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, employee stock ownership plans, and profit-sharing plans.

Other types of qualified plans include individual retirement accounts (IRAs), simplified employee pensions, 403(b) plans, Savings Incentive Match Plans for Employees (SIMPLE), and 457 plans. These are often used by the self-employed, employees of small companies, and tax-exempt organizations.

Traditional IRA

An ordinary individual retirement account (IRA), also called a traditional IRA, is any IRA that is not a Roth IRA or a Savings Incentive Match Plan for Employees (SIMPLE) IRA. An IRA, in general, allows a participant to deduct some or all of their contributions to the account. The contributions and earnings are not taxed until distributed. Even those who are covered by a retirement plan through their employer are able to contribute to a traditional IRA. However, all or part of the contributions may not be deductible if the plan participant or their spouse are covered by an employer-sponsored retirement plan.

In order to be eligible to contribute to an IRA, an individual must be under the age of 70½ and have taxable income such as wages, salaries, commissions, tips, bonuses, or self-employment.

Nonqualified plans

Some companies provide additional benefits to executives via nonqualified deferred compensation plans. These plans either allow participants to defer receipt of income or provide a supplemental retirement benefit beyond the limits placed on qualified plans. As such, the employee’s benefit is unsecured and not protected by ERISA or the Employee Benefit Security Administration.

Other issues

Minimum funding standards apply to certain retirement benefit plans. Other varieties of retirement benefit plans must be funded according to the terms of the governing plan document. An annual report (Form 5500) must be filed with the Internal Revenue Service (IRS) and made available for participants to inspect.

ERISA establishes certain minimum eligibility requirements for retirement benefit plans, mandating that employees cannot be excluded from participating provided they are at least 21 years old and have completed one year of service. ERISA also establishes minimum vesting requirements for retirement benefit plans.

Vesting is the process by which a retirement benefit becomes nonforfeitable; that is, when employees are permanently entitled to a portion of or all of their benefits derived from employer contributions. Two different types of vesting exist:

  • Cliff vesting is where benefits derived from employer contributions become 100 percent nonforfeitable after passage of a certain number of years.
  • Graded vesting is where the benefits derived from employer contributions become incrementally nonforfeitable over a set period of years.

403(b) Plans

A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan. The employer may also contribute to the plan for employees.

Saver’s Credit

The Internal Revenue Service (IRS) offers a special tax break called the Saver’s Credit that may be available to lower income taxpayers. By following certain guidelines outlined by the IRS, workers who contribute to a 401(k) plan, 403(b) plan, governmental 457 plan, and similar employer-sponsored retirement programs, may be eligible for this tax break.

Investment policy statement

An investment policy statement is simply a written plan to help guide the long-term investment goals for a company’s 401(k) plan. It is created to establish the guidelines for providing investment options in the plan. Participants rely on their employer’s “due diligence,” or thorough investigation, when a retirement plan vehicle is offered to help them prepare for their financial future.

Retirement plan fee disclosures and information

  • Retirement plan administrators must ensure participants and beneficiaries are aware of their rights and responsibilities for their accounts.

The investment of plan assets is a fiduciary act governed by the fiduciary standards in ERISA 404(a)(1)(A) and (B), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.

When a plan allocates investment responsibilities to participants or beneficiaries, the plan administrator must take steps to ensure that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts. The administrator must provide sufficient information regarding the plan and the plan’s investment options, including fee and expense information, to allow participants and beneficiaries to make informed decisions regarding the management of their individual accounts.

Plan-related information

The first category of information that must be disclosed is plan-related information. This general category is further divided into three subcategories as follows:

  1. General plan information
    General plan information consists of information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions under the plan, a current list of the plan’s investment options, and a description of any “brokerage window” or similar arrangement that enables the selection of investments beyond those designated by the plan.
  2. Administrative expenses information
    This information includes an explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts. Examples include fees and expenses for legal, accounting, and recordkeeping services.
  3. Individual expenses information
    An explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary based on the actions taken by that person. Examples include fees and expenses for plan loans and for processing qualified domestic relations orders.

The information in these three subcategories must be given to participants on or before the date they can first direct their investments, and then again annually thereafter.

In addition to the plan-related information that must be furnished upfront and annually, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether “administrative” or “individual”) charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These specific disclosures may be included in quarterly benefit statements required under ERISA 105.

Investment-related information

The second category of information that must be disclosed is investment-related information. This category contains several subcategories of core information about each investment option under the plan, including:

  1. Performance data
    Participants must be provided specific information about historical investment performance. One-, 5- and 10-year returns must be provided for investment options, such as mutual funds, that do not have fixed rates of return. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.
  2. Benchmark information
    For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods (matching the performance data periods) must be provided. Investment options with fixed rates of return are not subject to this requirement.
  3. Fee and expense information
    For investment options that do not a have a fixed rate of return, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment must be provided.
  4. Website address
    Investment-related information includes a website address that is sufficiently specific to provide participants and beneficiaries access to additional information about the investment options for workers who want more or updated information.
  5. Glossary
    Investment-related information includes a general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or a website address that is sufficiently specific to provide access to such a glossary.
  6. Comparative format requirement
    Investment-related information must be provided to participants or beneficiaries on or before the date they can first direct their investments, and then again annually thereafter. It also must be provided in a chart or similar format designed to facilitate a comparison of each investment option available under the plan.
  7. Miscellaneous
    Plan administrators have some protection from liability for the completeness and accuracy of information provided to participants if the plan administrator reasonably and in good faith relies upon information provided by a service provider. After participants have invested in a particular investment option, they must be provided any materials the plan receives regarding voting, tender, or similar rights in the option. Upon request, the plan administrator must also provide prospectuses, financial reports, and statements of valuation and of assets held by an investment option.

The general disclosure regulation in 29 CFR 2520.104b-1 applies to material provided under this regulation, including the safe harbor for electronic disclosures at Paragraph (C).

Retirement plan fee disclosures and information

  • Retirement plan administrators must ensure participants and beneficiaries are aware of their rights and responsibilities for their accounts.

The investment of plan assets is a fiduciary act governed by the fiduciary standards in ERISA 404(a)(1)(A) and (B), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.

When a plan allocates investment responsibilities to participants or beneficiaries, the plan administrator must take steps to ensure that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts. The administrator must provide sufficient information regarding the plan and the plan’s investment options, including fee and expense information, to allow participants and beneficiaries to make informed decisions regarding the management of their individual accounts.

Plan-related information

The first category of information that must be disclosed is plan-related information. This general category is further divided into three subcategories as follows:

  1. General plan information
    General plan information consists of information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions under the plan, a current list of the plan’s investment options, and a description of any “brokerage window” or similar arrangement that enables the selection of investments beyond those designated by the plan.
  2. Administrative expenses information
    This information includes an explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts. Examples include fees and expenses for legal, accounting, and recordkeeping services.
  3. Individual expenses information
    An explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary based on the actions taken by that person. Examples include fees and expenses for plan loans and for processing qualified domestic relations orders.

The information in these three subcategories must be given to participants on or before the date they can first direct their investments, and then again annually thereafter.

In addition to the plan-related information that must be furnished upfront and annually, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether “administrative” or “individual”) charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These specific disclosures may be included in quarterly benefit statements required under ERISA 105.

Investment-related information

The second category of information that must be disclosed is investment-related information. This category contains several subcategories of core information about each investment option under the plan, including:

  1. Performance data
    Participants must be provided specific information about historical investment performance. One-, 5- and 10-year returns must be provided for investment options, such as mutual funds, that do not have fixed rates of return. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.
  2. Benchmark information
    For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods (matching the performance data periods) must be provided. Investment options with fixed rates of return are not subject to this requirement.
  3. Fee and expense information
    For investment options that do not a have a fixed rate of return, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment must be provided.
  4. Website address
    Investment-related information includes a website address that is sufficiently specific to provide participants and beneficiaries access to additional information about the investment options for workers who want more or updated information.
  5. Glossary
    Investment-related information includes a general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or a website address that is sufficiently specific to provide access to such a glossary.
  6. Comparative format requirement
    Investment-related information must be provided to participants or beneficiaries on or before the date they can first direct their investments, and then again annually thereafter. It also must be provided in a chart or similar format designed to facilitate a comparison of each investment option available under the plan.
  7. Miscellaneous
    Plan administrators have some protection from liability for the completeness and accuracy of information provided to participants if the plan administrator reasonably and in good faith relies upon information provided by a service provider. After participants have invested in a particular investment option, they must be provided any materials the plan receives regarding voting, tender, or similar rights in the option. Upon request, the plan administrator must also provide prospectuses, financial reports, and statements of valuation and of assets held by an investment option.

The general disclosure regulation in 29 CFR 2520.104b-1 applies to material provided under this regulation, including the safe harbor for electronic disclosures at Paragraph (C).

Automatic enrollment

  • Employers can enroll eligible employees in automatic contribution arrangements.

An automatic contribution arrangement (also known as automatic enrollment or auto enroll) is a retirement plan feature common in 401(k) plans, but can also be in one of the other plan types listed below that permit employees to make elective contributions:

  • 403(b) plans,
  • 457(b) plans of governmental employers,
  • Salary Reduction Simplified Employee Pensions (SARSEPs), and
  • Savings Incentive Match Plans for Employees (SIMPLE) individual retirement account (IRA) plans.

Automatic contribution arrangements allow employers to “enroll” eligible employees in the retirement plan automatically unless the employee affirmatively elects not to participate. “Enroll” means that the employer contributes part of the employee’s wages to the retirement plan on the employee’s behalf.

The employer automatically reduces an employee’s wages by a plan-specified default percentage and contributes that amount to the employee’s plan account as an automatic enrollment contribution. The employee may choose to:

  • Not contribute to the plan, or
  • Contribute a different amount.

Employees are always 100 percent vested (own) in their automatic enrollment contributions.

Generally, most plans deduct automatic enrollment contributions from an employee’s pre-tax wages. This means that the employees don’t pay taxes on the contributions. However, 401(k) and 403(b) plans that accept designated Roth contributions can specify that the automatic enrollment contributions are designated Roth contributions, which means they are deducted from an employee’s after-tax wages. An employer must deposit an employee’s automatic enrollment designated Roth contributions into a designated Roth account.

Bona fide profit-sharing plans or trusts and bona fide thrift savings plans

  • Bona fide profit-sharing plans or trusts and bona fide thrift or savings plans must meet certain FLSA requirements.

Bona fide profit-sharing plans

The Fair Labor Standards Act (FLSA) describes the requirements of bona fide profit-sharing plans or trusts. FLSA requires that employers include the determination of the total remuneration for a participant’s employment in the regular rate at which the participant is employed. However, it is not necessary to include any other payment to or on behalf of the employee for services performed during a given period; that payment is contributed to a bona fide profit-sharing plan or trust. (Section 7(e)(3)(b)) (29 CFR 549.0)

Section 7(e)(4) of FLSA governs the inclusion or exclusion from the regular rate of contributions made by an employer to any plan or trust (providing for old age, retirement, life, accident, or health insurance or similar benefits for employees). (29 CFR 778.214 and 778.215) However, if such a plan or trust is combined in a single program (whether in one or more documents) with a plan or trust for providing profit-sharing payments to employees, the profit-sharing payments may be excluded from the regular rate of contributions if they meet the requirements. (Section 7(e)(4)) The contributions made by the employer providing certain benefits may also be excluded from the regular rate if they meet the requirements. (Section 7 (e)(4)) (29 CFR 778.214 and 778.215)

Bona fide thrift or savings plans

FLSA also describes the requirements of bona fide thrift or savings plans. Similar to a bona fide profit-sharing plan, FLSA requires that employers include the determination of the total remuneration for a participant’s employment in the regular rate at which the participant is employed. However, it is not necessary to include any other payment to or on behalf of the employee for services performed during a given period; that payment is contributed to a bona fide thrift or savings plan. (Section 7(e)(3)(b)) (29 CFR 549.0)

Also similar to a bona fide profit-sharing plan, Section 7(e)(4) of FLSA governs the inclusion or exclusion from the regular rate of contributions made by an employer to any plan or trust (providing for old age, retirement, life, accident, or health insurance or similar benefits for employees). (29 CFR 778.214 and 778.215) However, if such a plan or trust is combined in a single program (whether in one or more documents) with a plan or trust for providing profit-sharing payments to employees, the profit-sharing payments may be excluded from the regular rate of contributions if they meet the requirements. (Section 7(e)(4)) The contributions made by the employer providing certain benefits may also be excluded from the regular rate if they meet the requirements. (Section 7 (e)(4)) (29 CFR 778.214 and 778.215) (29 CFR 549 and 778)

Defined benefit plan

  • A defined benefit plan, or pension plan, promises a specified monthly benefit at retirement.

The plan may state this promised benefit as an exact dollar amount, or it may calculate a benefit through a plan formula that considers factors like salary and service. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

Minimum Required Distribution

  • Starting at the age of 70½, individuals must take MRDs from their retirement accounts.

When participants reach age 70½, they must begin taking withdrawals from their retirement plans. This is referred to as a Minimum Required Distribution (MRD) or Required Minimum Distribution (RMD).

At this age, an MRD is necessary, and the participant must take these withdrawals from any retirement accounts that previously allowed tax-free deferrals or tax-deferred earnings. These typically include 401(k) plans, 403(b) plans, Rollover individual retirement accounts (IRAs), Savings Incentive Match Plans for Employees (SIMPLE) IRAs, Simplified Employee Pension Plan (SEP)-IRAs, Keogh plans, as well as traditional IRAs. The MRD is taxed as ordinary income at the federal income tax rate in the year in which the money is withdrawn.

Required date

The “required beginning date” for an MRD is April 1 following the year in which the individual attains age 70½. In subsequent years, the deadline is December 31.

Required amount

Amounts are based on life expectancy according to the appropriate Internal Revenue Service (IRS) life expectancy tables. A minimum amount is required, although more can always be taken if desired. If an account owner has multiple IRA accounts, the MRD must be calculated separately on each IRA each year. However, the IRA accounts may be aggregated so that the MRD may be withdrawn entirely from one account or as portions from each. Any qualified plan accounts or inherited IRAs must be calculated separately as well.

Penalty

The MRD may be withdrawn periodically throughout the year or in one lump sum distribution. If the participant fails to take an MRD at the appropriate time, one of the most severe IRS penalties will be imposed — 50 percent of the amount that should have been distributed will be forfeited.

Exceptions

There are always exceptions to every rule. For example, a Roth IRA is not subject to the MRD rules.

In addition, a person that continues to work after reaching age 70½ may not be bound by this rule in any current employer-sponsored retirement plan if the plan allows for it. Often a plan document will state that an active employee is not required to begin distributions until after termination of employment. If an account owner continues to work after age 70½ and meets the eligibility requirements, that owner can contribute to a Roth IRA. But generally, account owners cannot contribute to any other kind of IRA after reaching age 70½.

Minimum Required Distribution

  • Starting at the age of 70½, individuals must take MRDs from their retirement accounts.

When participants reach age 70½, they must begin taking withdrawals from their retirement plans. This is referred to as a Minimum Required Distribution (MRD) or Required Minimum Distribution (RMD).

At this age, an MRD is necessary, and the participant must take these withdrawals from any retirement accounts that previously allowed tax-free deferrals or tax-deferred earnings. These typically include 401(k) plans, 403(b) plans, Rollover individual retirement accounts (IRAs), Savings Incentive Match Plans for Employees (SIMPLE) IRAs, Simplified Employee Pension Plan (SEP)-IRAs, Keogh plans, as well as traditional IRAs. The MRD is taxed as ordinary income at the federal income tax rate in the year in which the money is withdrawn.

Required date

The “required beginning date” for an MRD is April 1 following the year in which the individual attains age 70½. In subsequent years, the deadline is December 31.

Required amount

Amounts are based on life expectancy according to the appropriate Internal Revenue Service (IRS) life expectancy tables. A minimum amount is required, although more can always be taken if desired. If an account owner has multiple IRA accounts, the MRD must be calculated separately on each IRA each year. However, the IRA accounts may be aggregated so that the MRD may be withdrawn entirely from one account or as portions from each. Any qualified plan accounts or inherited IRAs must be calculated separately as well.

Penalty

The MRD may be withdrawn periodically throughout the year or in one lump sum distribution. If the participant fails to take an MRD at the appropriate time, one of the most severe IRS penalties will be imposed — 50 percent of the amount that should have been distributed will be forfeited.

Exceptions

There are always exceptions to every rule. For example, a Roth IRA is not subject to the MRD rules.

In addition, a person that continues to work after reaching age 70½ may not be bound by this rule in any current employer-sponsored retirement plan if the plan allows for it. Often a plan document will state that an active employee is not required to begin distributions until after termination of employment. If an account owner continues to work after age 70½ and meets the eligibility requirements, that owner can contribute to a Roth IRA. But generally, account owners cannot contribute to any other kind of IRA after reaching age 70½.

Qualified Domestic Relations Order

  • A pension plan must stipulate the distribution procedures in the event of a QDRO.

Often as a result of a divorce settlement, it is determined that all or a portion of a participant’s retirement plan benefit — whether from a defined contribution plan or a defined benefit plan — should be split and paid to the former spouse or “alternate payee.” An “alternate payee” may be a spouse, former spouse, child, or other dependent of a participant. A court order that creates the existence of an “alternate payee’s” right to receive all or a portion of the benefits payable with respect to a participant under a qualified retirement plan is referred to as a Qualified Domestic Relations Order (QDRO).

Components

Just the fact that a property settlement in a divorce situation is agreed to and signed by the parties does not necessarily cause the agreement to become a QDRO. It must be issued by a state authority, generally a court, before it qualifies. Basic information must be included in a QDRO such as names, mailing addresses of both parties, name of the plan, dollar amount or percentage to be paid to the alternate payee, and the number of payments or time period to which the order applies.

Every pension plan is required to establish written procedures for determining whether a domestic relations order is actually a QDRO and for administering distributions under it. An employer can process each QDRO in-house or pay an attorney, record keeper, or actuary to process it.

How are QDROs processed?

For employers who process the QDROs in-house, there are certain things to keep in mind:

  • Plan administrators may develop a “model” QDRO form with acceptable language to assist attorneys in the preparation of a QDRO.
  • Upon receipt of a “draft” copy of the QDRO, the plan administrator should make sure that all the information is complete and accurate. The proposed QDRO cannot require a benefit or form of benefit not otherwise provided under the plan.
  • The plan administrator must promptly notify participants and all alternate payees of the draft copy, as well as provide a copy of the plan’s procedures to them.
  • Once the plan administrator has determined the draft to be “qualified,” the approval should be sent to the attorney for final revisions and submission to the court.
  • Upon receipt of the final court order, the plan administrator is required to notify the participants and all alternate payees promptly.

Timeframe

Processing of the retirement plan benefit per the stipulations of the QDRO should be done within a reasonable time period upon receipt of the final court documentation. These are mandatory orders which a plan sponsor must abide by and should be conscientiously followed.

Employee Benefits Security Administration (EBSA)

  • EBSA enforces the provisions of ERISA by promoting voluntary compliance and facilitating self-regulation by employers.

The Employee Benefits Security Administration (EBSA) is responsible for administering and enforcing the fiduciary, reporting, and disclosure provisions of Title I of the Employee Retirement Income Security Act (ERISA) of 1974. The agency oversees approximately 700,000 pension plans and another six million health and welfare benefits plans.

The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor (DOL), were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. Since its enactment in 1974, ERISA has been amended to meet the changing retirement and health care needs of employees and their families. The role of EBSA has also evolved to meet these challenges.

The administration of ERISA is divided among the U.S. DOL, the Internal Revenue Service (IRS) of the Department of the Treasury, and the Pension Benefit Guaranty Corporation (PBGC). Title I, which contains rules for reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil enforcement, is administered by the U.S. DOL. Title II of ERISA, which amended the Internal Revenue Code (IRC) to parallel many of the Title I rules, is administered by the IRS. Title III is concerned with jurisdictional matters and coordination of enforcement and regulatory activities by the U.S. DOL and the IRS. Title IV covers the insurance of defined benefit pension plans and is administered by the PBGC.

EBSA promotes voluntary compliance and facilitates self-regulation, working to provide assistance to plan participants and beneficiaries. The department’s responsibilities under ERISA have been expanded by health care reform. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), and the Health Insurance Portability and Accountability Act of 1996 (HIPAA), gave the department broad additional responsibilities with respect to private health plans.

Employee Retirement Income Security Act (ERISA)

  • ERISA establishes standards and requirements for employer pension plans in the private sector.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that regulates pension plans and welfare benefit plans in the private industry. It pre-empts state laws that relate to employee benefit plans. For example, if organizations maintain a pension plan, ERISA specifies when employees must be allowed to become a participant, how long employees must work before earning a non-forfeitable interest in their pension, how long they can be away from their jobs before it might affect their benefits, and whether their spouses have a right to part of their pensions in the event of their deaths. Most of the provisions of ERISA are effective for plan years beginning on or after January 1, 1975.

ERISA does not require any employer to establish a pension plan. It only requires that those who do establish plans meet certain minimum standards. The law generally does not specify how much money a participant must be paid as a benefit.

Background

The goal of Title I is to protect the interests of participants and their beneficiaries in employee benefit plans. Among other things, ERISA requires that sponsors of private employee benefit plans provide participants and beneficiaries with adequate information regarding their plans. Also, individuals who manage plans (and other fiduciaries) must meet certain standards of conduct, derived from the common law of trusts and made applicable (with certain modifications) to all fiduciaries. The law also contains detailed provisions for reporting to the government and disclosure to participants. Furthermore, there are civil enforcement provisions aimed at assuring that plan funds are protected and that participants who qualify receive their benefits.

Coverage

ERISA covers pension plans and welfare benefit plans (e.g., employment based medical and hospitalization benefits, apprenticeship plans, and other plans described in Section 3(1) of Title I). Plan sponsors must design and administer their plans in accordance with ERISA. Title II of ERISA contains standards that must be met by employee pension benefit plans in order to qualify for favorable tax treatment. Noncompliance with these tax qualification requirements of ERISA may result in disqualification of a plan and/or other penalties.

Form 5500

The Internal Revenue Service (IRS), DOL, and Pension Benefit Guaranty Corporation developed the Form 5500-series returns for employee benefit plans to satisfy annual reporting requirements under ERISA and the Internal Revenue Code (IRC). Plan sponsors must generally file the return on the last day of the seventh month after their plan years end.

ERISA requirements

  • ERISA requires that plan administrators give participants adequate information about their retirement plans.

The Employee Retirement Income Security Act of 1974 (ERISA) requires employers to maintain a funding vehicle for certain plans and indicates permitted types of funding vehicles. It also places limitations on the types of personnel who can manage plans and the plan assets; and indicates when such personnel may be compensated for work on the plan.

Plan administrators must give participants certain facts in writing about their retirement and health benefit plans. These facts must include plan rules, financial information, and documents on the operation and management of the plan. Some of the facts must be provided regularly and automatically by the plan administrator. Others can be made available upon request, free-of-charge or for copying fees. The request should be made in writing.

Summary annual report (SAR)

The administrator of any employee benefit plan must each year provide a summary annual report (SAR) that confirms the requirements (except as otherwise provided in Paragraph G) of 29 CFR 2520.104b-1 to each participant of the plan and to each beneficiary receiving benefits under the plan (other than beneficiaries under a welfare plan). The administrator must provide the SAR in accordance with the requirements of 2520.104b-1.

This is a summary of the annual financial report that most plans must file with the Department of Labor (DOL) on the Form 5500. The summary annual report is provided at no cost. To learn more about the plan assets, participants may ask the plan administrator for a copy of the annual report in its entirety.

Summary plan descriptions

  • SPDs contain important information about plan participants and beneficiaries’ rights, benefits, and responsibilities.

One of the most important documents participants are entitled to receive automatically is a summary of the benefit plan, called the summary plan description (SPD). The Employee Retirement Income Security Act (ERISA) requires plan administrators to give to participants and beneficiaries an SPD describing their rights, benefits, and responsibilities under the plan in understandable language. The SPD must be provided when an employee becomes a participant of an ERISA-covered retirement or health benefit plan, or when a beneficiary receives benefits under such a plan.

The plan administrator is legally obligated to provide the SPD to participants, free of charge. The SPD tells participants what the plan provides and how it operates, including information such as:

  • The name and type of plan;
  • The plan’s requirements regarding eligibility;
  • Description of the benefits and when participants have a right to those benefits;
  • How the service and benefits are calculated;
  • When the benefits become vested;
  • Statement that the plan is maintained pursuant to a collective bargaining agreement, if applicable;
  • Statement about whether the plan is covered by termination insurance from the Pension Benefit Guaranty Corporation (PBGC);
  • Source of contributions to the plan and the methods used to calculate the amount of contributions;
  • Provisions governing termination of the plan;
  • Procedures regarding claims for benefits and remedies for disputing denied claims; and
  • Statement of rights available to plan participants under ERISA.

If a plan is changed, participants must be informed, either through a revised SPD, or in a separate document, called a summary of material modification (SMM), which also must be given to participants free of charge. The SMM must be written in a manner that the average participant can understand.

Updated SPDs must be provided every five years if changes are made to the SPD information or the plan is amended; otherwise, they must be provided every ten years. New employees must receive a copy of their plan sponsor’s latest SPD within 90 days after becoming covered by the plan. Plan sponsors are not required to file the SPD with the Department of Labor (DOL), although they are required to provide it to DOL upon request.

ERISA also requires that SPDs be updated periodically. Furthermore, ERISA requires disclosure of any material reduction in covered services or benefits to participants and beneficiaries generally within 60 days of the adoption of the change through either a revised SPD or an SMM. Material changes that do not result in a reduction in covered services or benefits must be disclosed through an SMM or a revised SPD not later than 210 days after the end of the plan year in which the change was adopted.

SPDs for health plans

Among other information, the SPD of health plans must describe the following:

  • Cost-sharing provisions including premiums, deductibles, coinsurance, and co-payment amounts for which the participant or beneficiary will be responsible;
  • Annual or lifetime caps or other limits on benefits under the plan;
  • The extent to which preventive services are covered under the plan;
  • Whether, and under what circumstances, existing and new drugs are covered under the plan;
  • Whether, and under what circumstances, coverage is provided for medical tests, devices, and procedures;
  • Provisions governing the use of network providers, the composition of provider networks and whether, and under what circumstances, coverage is provided for out-of-network services;
  • Conditions or limits on the selection of primary care providers or providers of specialty medical care;
  • Conditions or limits applicable to obtaining emergency medical care; and
  • Provisions requiring preauthorization or utilization review as a condition to obtaining a benefit or service under the plan.

The DOL website has more information on SPDs and their importance.

ERISA violations

  • EBSA conducts fiduciary or criminal violations under ERISA.

A variety of violations can occur under The Employee Retirement Income Security Act of 1974 (ERISA). Some examples of fiduciary violations include the following:

  • The failure of fiduciaries to operate the plan prudently and for the exclusive benefit of participants.
  • The use of plan assets to benefit certain related parties in interest to the plan, including the plan administrator, the plan sponsor, and parties related to these individuals.
  • The failure to properly value plan assets at their current fair market value, or to hold plan assets in trust.
  • The failure to make benefit payments, either pension or welfare, due under the terms of the plan.
  • Taking any adverse action against individuals for exercising their rights under their plans (e.g., being fired, fined, or otherwise discriminated against).
  • The failure of employers to offer continuing group health care coverage to individuals for at least 18 months after leaving that employer.

In addition to the fiduciary violations, the Employee Benefits Security Administration (EBSA) also conducts investigations of criminal violations regarding employee benefit plans such as embezzlement, kickbacks, and false statements under Title 18 of the U.S. Criminal Code. Prosecution is handled by the U.S. Attorneys’ Offices. Title 18 contains three statutes which directly address violations involving employee benefit plans:

  • Theft or Embezzlement from Employee Benefit Plan (18 USC 664),
  • False Statements or Concealment of Facts in Relation to Documents Required by the Employee Retirement Income Security Act of 1974 (18 USC 1027), and
  • Offer, Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan (18 USC 1954).

ERISA also contains the following criminal provisions:

  • 29 USC 411, Prohibition Against Certain Persons Holding Certain Positions;
  • 501, Willful Violation of Title I, Part 1; and
  • 511, Coercive Interference.

Persons convicted of violations enumerated in 411 are subject to a bar from holding plan positions or providing services to plans for up to 13 years.

Decisions to seek criminal action turn on a number of factors, including:

  • The egregiousness and magnitude of the violation,
  • The desirability and likelihood of incarceration both as a deterrent and as a punishment, or
  • Whether the case involves a prior ERISA violator.

ERISA requirements

  • ERISA requires that plan administrators give participants adequate information about their retirement plans.

The Employee Retirement Income Security Act of 1974 (ERISA) requires employers to maintain a funding vehicle for certain plans and indicates permitted types of funding vehicles. It also places limitations on the types of personnel who can manage plans and the plan assets; and indicates when such personnel may be compensated for work on the plan.

Plan administrators must give participants certain facts in writing about their retirement and health benefit plans. These facts must include plan rules, financial information, and documents on the operation and management of the plan. Some of the facts must be provided regularly and automatically by the plan administrator. Others can be made available upon request, free-of-charge or for copying fees. The request should be made in writing.

Summary annual report (SAR)

The administrator of any employee benefit plan must each year provide a summary annual report (SAR) that confirms the requirements (except as otherwise provided in Paragraph G) of 29 CFR 2520.104b-1 to each participant of the plan and to each beneficiary receiving benefits under the plan (other than beneficiaries under a welfare plan). The administrator must provide the SAR in accordance with the requirements of 2520.104b-1.

This is a summary of the annual financial report that most plans must file with the Department of Labor (DOL) on the Form 5500. The summary annual report is provided at no cost. To learn more about the plan assets, participants may ask the plan administrator for a copy of the annual report in its entirety.

Summary plan descriptions

  • SPDs contain important information about plan participants and beneficiaries’ rights, benefits, and responsibilities.

One of the most important documents participants are entitled to receive automatically is a summary of the benefit plan, called the summary plan description (SPD). The Employee Retirement Income Security Act (ERISA) requires plan administrators to give to participants and beneficiaries an SPD describing their rights, benefits, and responsibilities under the plan in understandable language. The SPD must be provided when an employee becomes a participant of an ERISA-covered retirement or health benefit plan, or when a beneficiary receives benefits under such a plan.

The plan administrator is legally obligated to provide the SPD to participants, free of charge. The SPD tells participants what the plan provides and how it operates, including information such as:

  • The name and type of plan;
  • The plan’s requirements regarding eligibility;
  • Description of the benefits and when participants have a right to those benefits;
  • How the service and benefits are calculated;
  • When the benefits become vested;
  • Statement that the plan is maintained pursuant to a collective bargaining agreement, if applicable;
  • Statement about whether the plan is covered by termination insurance from the Pension Benefit Guaranty Corporation (PBGC);
  • Source of contributions to the plan and the methods used to calculate the amount of contributions;
  • Provisions governing termination of the plan;
  • Procedures regarding claims for benefits and remedies for disputing denied claims; and
  • Statement of rights available to plan participants under ERISA.

If a plan is changed, participants must be informed, either through a revised SPD, or in a separate document, called a summary of material modification (SMM), which also must be given to participants free of charge. The SMM must be written in a manner that the average participant can understand.

Updated SPDs must be provided every five years if changes are made to the SPD information or the plan is amended; otherwise, they must be provided every ten years. New employees must receive a copy of their plan sponsor’s latest SPD within 90 days after becoming covered by the plan. Plan sponsors are not required to file the SPD with the Department of Labor (DOL), although they are required to provide it to DOL upon request.

ERISA also requires that SPDs be updated periodically. Furthermore, ERISA requires disclosure of any material reduction in covered services or benefits to participants and beneficiaries generally within 60 days of the adoption of the change through either a revised SPD or an SMM. Material changes that do not result in a reduction in covered services or benefits must be disclosed through an SMM or a revised SPD not later than 210 days after the end of the plan year in which the change was adopted.

SPDs for health plans

Among other information, the SPD of health plans must describe the following:

  • Cost-sharing provisions including premiums, deductibles, coinsurance, and co-payment amounts for which the participant or beneficiary will be responsible;
  • Annual or lifetime caps or other limits on benefits under the plan;
  • The extent to which preventive services are covered under the plan;
  • Whether, and under what circumstances, existing and new drugs are covered under the plan;
  • Whether, and under what circumstances, coverage is provided for medical tests, devices, and procedures;
  • Provisions governing the use of network providers, the composition of provider networks and whether, and under what circumstances, coverage is provided for out-of-network services;
  • Conditions or limits on the selection of primary care providers or providers of specialty medical care;
  • Conditions or limits applicable to obtaining emergency medical care; and
  • Provisions requiring preauthorization or utilization review as a condition to obtaining a benefit or service under the plan.

The DOL website has more information on SPDs and their importance.

Summary plan descriptions

  • SPDs contain important information about plan participants and beneficiaries’ rights, benefits, and responsibilities.

One of the most important documents participants are entitled to receive automatically is a summary of the benefit plan, called the summary plan description (SPD). The Employee Retirement Income Security Act (ERISA) requires plan administrators to give to participants and beneficiaries an SPD describing their rights, benefits, and responsibilities under the plan in understandable language. The SPD must be provided when an employee becomes a participant of an ERISA-covered retirement or health benefit plan, or when a beneficiary receives benefits under such a plan.

The plan administrator is legally obligated to provide the SPD to participants, free of charge. The SPD tells participants what the plan provides and how it operates, including information such as:

  • The name and type of plan;
  • The plan’s requirements regarding eligibility;
  • Description of the benefits and when participants have a right to those benefits;
  • How the service and benefits are calculated;
  • When the benefits become vested;
  • Statement that the plan is maintained pursuant to a collective bargaining agreement, if applicable;
  • Statement about whether the plan is covered by termination insurance from the Pension Benefit Guaranty Corporation (PBGC);
  • Source of contributions to the plan and the methods used to calculate the amount of contributions;
  • Provisions governing termination of the plan;
  • Procedures regarding claims for benefits and remedies for disputing denied claims; and
  • Statement of rights available to plan participants under ERISA.

If a plan is changed, participants must be informed, either through a revised SPD, or in a separate document, called a summary of material modification (SMM), which also must be given to participants free of charge. The SMM must be written in a manner that the average participant can understand.

Updated SPDs must be provided every five years if changes are made to the SPD information or the plan is amended; otherwise, they must be provided every ten years. New employees must receive a copy of their plan sponsor’s latest SPD within 90 days after becoming covered by the plan. Plan sponsors are not required to file the SPD with the Department of Labor (DOL), although they are required to provide it to DOL upon request.

ERISA also requires that SPDs be updated periodically. Furthermore, ERISA requires disclosure of any material reduction in covered services or benefits to participants and beneficiaries generally within 60 days of the adoption of the change through either a revised SPD or an SMM. Material changes that do not result in a reduction in covered services or benefits must be disclosed through an SMM or a revised SPD not later than 210 days after the end of the plan year in which the change was adopted.

SPDs for health plans

Among other information, the SPD of health plans must describe the following:

  • Cost-sharing provisions including premiums, deductibles, coinsurance, and co-payment amounts for which the participant or beneficiary will be responsible;
  • Annual or lifetime caps or other limits on benefits under the plan;
  • The extent to which preventive services are covered under the plan;
  • Whether, and under what circumstances, existing and new drugs are covered under the plan;
  • Whether, and under what circumstances, coverage is provided for medical tests, devices, and procedures;
  • Provisions governing the use of network providers, the composition of provider networks and whether, and under what circumstances, coverage is provided for out-of-network services;
  • Conditions or limits on the selection of primary care providers or providers of specialty medical care;
  • Conditions or limits applicable to obtaining emergency medical care; and
  • Provisions requiring preauthorization or utilization review as a condition to obtaining a benefit or service under the plan.

The DOL website has more information on SPDs and their importance.

ERISA violations

  • EBSA conducts fiduciary or criminal violations under ERISA.

A variety of violations can occur under The Employee Retirement Income Security Act of 1974 (ERISA). Some examples of fiduciary violations include the following:

  • The failure of fiduciaries to operate the plan prudently and for the exclusive benefit of participants.
  • The use of plan assets to benefit certain related parties in interest to the plan, including the plan administrator, the plan sponsor, and parties related to these individuals.
  • The failure to properly value plan assets at their current fair market value, or to hold plan assets in trust.
  • The failure to make benefit payments, either pension or welfare, due under the terms of the plan.
  • Taking any adverse action against individuals for exercising their rights under their plans (e.g., being fired, fined, or otherwise discriminated against).
  • The failure of employers to offer continuing group health care coverage to individuals for at least 18 months after leaving that employer.

In addition to the fiduciary violations, the Employee Benefits Security Administration (EBSA) also conducts investigations of criminal violations regarding employee benefit plans such as embezzlement, kickbacks, and false statements under Title 18 of the U.S. Criminal Code. Prosecution is handled by the U.S. Attorneys’ Offices. Title 18 contains three statutes which directly address violations involving employee benefit plans:

  • Theft or Embezzlement from Employee Benefit Plan (18 USC 664),
  • False Statements or Concealment of Facts in Relation to Documents Required by the Employee Retirement Income Security Act of 1974 (18 USC 1027), and
  • Offer, Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan (18 USC 1954).

ERISA also contains the following criminal provisions:

  • 29 USC 411, Prohibition Against Certain Persons Holding Certain Positions;
  • 501, Willful Violation of Title I, Part 1; and
  • 511, Coercive Interference.

Persons convicted of violations enumerated in 411 are subject to a bar from holding plan positions or providing services to plans for up to 13 years.

Decisions to seek criminal action turn on a number of factors, including:

  • The egregiousness and magnitude of the violation,
  • The desirability and likelihood of incarceration both as a deterrent and as a punishment, or
  • Whether the case involves a prior ERISA violator.

Pension Benefits Guaranty Corporation (PBGC)

  • The role of the PBGC is to protect retirees’ income and benefits.

The Pension Benefits Guaranty Corporation (PBGC) is a federal corporation created by the Employee Retirement Income Security Act of 1974 (ERISA). It was created to:

  • Encourage the growth of defined benefit pension plans,
  • Provide timely and uninterrupted payment of pension benefits, and
  • Keep pension insurance premiums at a minimum.

PBGC protects the retirement incomes of nearly 44.3 million American workers in more than 31,000 private defined benefit pension plans. It is not funded by general tax revenues; PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments, and receives funds from pension plans it takes over.

PBGC pays monthly retirement benefits, up to a guaranteed maximum, to retirees in thousands of pension plans that terminated. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of over 1 million former employees. An employer can voluntarily ask to close its single employer pension plan in either a standard or distress termination.

In a standard termination, the plan must have enough money to pay all benefits, whether vested or not, before the plan can end. After workers receive promised benefits, in the form of a lump sum payment or an insurance company annuity, PBGC’s guarantee ends. In a distress termination, where the plan does not have enough money to pay all benefits, the employer must prove severe financial distress, such as the likelihood that continuing the plan would force the company to shut down. PBGC will pay guaranteed benefits, usually covering a large part of total earned benefits, and make strong efforts to recover funds from the employer.

In addition, PBGC may seek to close a single-employer plan without the employer’s consent to protect the interests of workers, the plan, or PBGC’s insurance fund. PBGC must act to terminate a plan that cannot pay current benefits. For multiemployer pension plans that are unable to pay guaranteed benefits when due, PBGC will provide financial assistance to the plan, usually a loan, so that retirees continue receiving their benefits.

Pension Protection Act (PPA)

  • The PPA includes retirement plan provisions related to vesting, hardship distributions, and automatic enrollment.

Pension Protection Act

The Pension Protection Act of 2006 (PPA) was signed into law on August 17, 2006. It includes a number of significant tax incentives to enhance retirement savings for many Americans. Some of the retirement-related provisions include the following:

  • Permanent retirement and savings incentives – The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) substantially increased pension and individual retirement account (IRA) contribution limits through 2010 as well as made other improvements in pensions and retirement savings through enhanced vesting, portability, and reduced regulatory burdens. The law made these changes permanent.
  • Vesting – All employer contributions made to a defined contribution plan must be vested using either a six-year graded or a three-year cliff vesting schedule.
  • Notice and consent period regarding distributions – A notice must be provided to plan participants at least 30 days but not more than 180 days before a distribution stating the participant’s rights regarding cash-outs (explaining the consequences of not deferring the distribution), eligible rollover distributions, and survivor annuities.
  • Saver’s Credit made permanent – The law made permanent the Saver’s Credit of up to $2,000.
  • Requirement to allow employees to divest plan assets – The law requires employers to allow participants in defined contribution plans that are invested in employer securities to elect to direct the plan to divest the employer securities into other investment options. Participants are required to be notified of their right to divest and of the importance of diversification.
  • Hardship distributions – This provision modifies the rules governing hardship to include events that occur to a participant’s spouse or dependent.
  • Treatment of individual retirement account (IRA) contributions for Guard and Reservists called to active duty – The law provides that distributions from an IRA or pension plan taken by members of the National Guard and Army Reserve called to active duty between 9/11/2001 and 12/31/2007 for a period in excess of 179 days are not subject to early withdrawal penalties. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limit.
  • Rollover rules – The law provides new rollover requirements for after-tax rollovers in annuity contracts, direct rollovers from retirement plans to Roth IRAs, and rollovers by nonspouse beneficiaries of certain retirement plan distributions.
  • In-service distributions at age 62 – The law allows pension plans to provide for distributions to employees who have attained age 62 and have not separated from employment at the time of the distributions.
  • Automatic enrollment – The law creates a safe harbor to encourage employers to offer automatic enrollment in defined contribution pension plans.
  • Combined defined benefit and defined contribution plan – The law creates a new type of plan for small employers (with no more than 500 employees) consisting of a combination defined benefit plan and defined contribution plan where the assets are held in a single trust.

Restricted stock

  • Restricted stock is a form of employee benefit usually offered to company executives.
  • Restricted stocks are not taxed until the stock vests, which will not happen until the restrictions lapse (usually within three to five years).

Restricted stock is generally awarded to a select number of top executives in a company. It is simply a grant of a number of shares of company stock with certain limitations on it. If the employee leaves the company before the stock vests, their shares are forfeited. The important details to remember in a restricted stock grant are the number of shares and when it is received.

Vesting

Once the restrictions lapse, the shares become vested. Typical restriction periods are three to five years; however, they can be more or less than this. Some grants vest all at once and others are subject to vest in tiers (i.e., one-third of the shares will vest each year for three years). The employee receives the full value of the shares at the time of vesting, not just the gain since the date of the award.

Vesting can be determined in three ways:

  • At a specified date (time-based),
  • When a performance target is met (performance-based), or
  • When a performance target is met by a certain date (a combination of both ways mentioned above).

Taxation

Restricted stock is generally not taxed until the stock vests. At that time, the stock is treated as ordinary income to the employee. There is, however, an option available to participants called an “83(b) election.” If this election is made within 30 days of the grant date, then the participant may pay the tax at the time the shares are issued instead of when they vest. Any increase in the stock’s value can then be taxed at the lower capital gains rate. This method is not used frequently. However, if the participant believes there is great upside potential, then it may be worthwhile.

Besides having to come up with the money to pay the taxes in advance, another major drawback to this election is that the participant risks the chance of paying the IRS for income never received. Should participants leave the company and forfeit the stock prior to vesting, they are not entitled to any refund of taxes previously paid.

Ownership

Once the grant is made, employees own the stock outright. They can vote the stock and receive dividends. As a recruitment and retention tool, restricted stock can be of value to an organization. The employee can never lose because the share price never falls below zero, and the company uses the grant as a “golden handcuff.”

Restricted stock vs. stock option

Restricted stock usually retains some value — unlike a stock option, which can become useless if the stock price falls below the strike price (the price on the date it was granted). Employees may be awarded fewer shares of restricted stock than stock options, but they are much less risky. In addition, the immediate ownership rights of those holding restricted stock are not given to those who have been granted stock options. Until the options are vested and purchased by the employee, the employee does not have ownership rights to the stock.

While some companies have already reduced equity-based compensation over the last few years, the movement is accelerating because of an accounting rule that requires companies to count stock options as expenses. These are a few of the major differences between the two types of long-term incentive awards being used by companies.

401(k) loans

  • Employees can borrow loans from their 401(k) account balance.

Employees’ 401(k) plans may allow them to borrow from their account balances. However, employees should consider a few things before taking a loan from their 401(k)s.

If the employee doesn’t repay the loan, including interest, according to the loan’s terms, any unpaid amounts become a plan distribution to them. The plan may even require employees to repay the loan in full if they leave their jobs.

Generally, employees have to include any previously untaxed amounts of the distribution in their gross incomes in the year in which the distributions occur. An employee may also have to pay an additional 10 percent tax on the amount of the taxable distribution, unless the employee:

  • Is at least age 59 ½, or
  • Qualifies for another exception.

Any unpaid loan amount also means the employee will have less money saved for retirement.

Supplemental Executive Retirement Plan (SERP)

What is a SERP?

A supplemental executive retirement plan (SERP) is a deferred compensation agreement between the company and the key executive whereby if the executive meets certain pre-agreed eligibility and vesting conditions, the company agrees to provide supplemental retirement income to the executive and the executive’s family.

The plan is funded by the company out of cash flows, investment funds, or cash value life insurance. Any deferred benefits are not currently taxable to the key executive. When paid, the benefits become taxable to the executive as income and tax deductible to the company. A typical example of a plan would provide the executive a retirement benefit from all employer provided retirement benefit plans equal to 70 percent of the executives high three-year average compensation.

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