ERISA Pension Benefits after Termination

Employee Retirement Income Security Act of 1974

The Employee Retirement Income Security Act of 1974, or ERISA, protects the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire.

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ERISA does not require that pension benefits be disbursed before normal retirement age, usually age 65. By that age an employee is usually "vested" in a retirement plan--that is, the employee has earned the years of service credit required to retire with a pension.

Dislocated workers face two important issues when they leave employment: access to pension funds and the continued safety of their pension benefit investments.

Can I get my pension money if I am laid off?

Generally, if you are enrolled in a 401(k), profit sharing or other type of defined contribution plan (a plan in which you have an individual account), your plan may provide for a lump sum distribution of your retirement money when you leave the company.

However, if you are in a defined benefit plan (a plan in which you receive a fixed, pre- established benefit) your benefits begin at retirement age. These types of plans are less likely to contain a provision that enables you to withdraw money early.

Whether you have a defined contribution or a defined benefit plan, the form of your pension distribution (lump sum, annuity, etc.) and the date your pension money will be available to you depend upon the provisions contained in your plan documents. Some plans do not permit distribution until you reach a specified age. Other plans do not permit distribution until you have been separated from employment for a certain period of time. In addition, some plans process distributions throughout the year and others only process them once a year. You should contact your pension plan administrator regarding the rules that govern the distribution of your pension money.

One of the most important documents you should have is the summary plan description (SPD). It outlines what your benefits are and how they are calculated. A copy of the SPD is available from your employer or pension plan administrator.

In addition to the SPD, your employer also may give you--or you may request--an individual benefit statement showing the value of your pension benefits-- the amount you have actually earned to date and your vesting status. These documents contain important information for you, whether you withdraw your money now or later.

Is my plan required to give me a lump-sum distribution?

ERISA does not require pension and profit-sharing plans to provide for lump-sum distributions. Lump-sum distributions are possible only if the plan specifically provides for them and only if you meet the plan's eligibility requirements.

If I withdraw retirement money, are there potential adverse effects?

Yes. Receiving a lump sum or other distribution from your pension plan may affect your ability to receive unemployment compensation. You should check with your state unemployment office.

In addition, receiving money from your pension plan may result in additional income tax. You can defer these taxes, however, if you keep the money in your plan or if you "roll over" the money into a qualified pension plan or Individual Retirement Account (IRA). There are provisions in the Internal Revenue Code that allow these rollovers.

Generally, your plan is required to withhold 20 percent of an eligible rollover distribution unless you elect to have the distribution paid directly to an eligible retirement plan, including an IRA. This is known as a "direct rollover." If there is no direct rollover, you will have to make up the 20 percent withholding to avoid tax consequences on the full rollover amount. The IRS does not require 20 percent withholding of an eligible rollover distribution that, when added to other rollover distributions made to you during the year, is less than $200.

Under IRS rules, and in order to avoid certain tax consequences, you have 60 days to roll over the distribution you received to another qualified plan or IRA if you wish to avoid the tax consequences.

If you have a choice between leaving the money in your current pension plan or depositing it in an IRA, you should carefully evaluate the investments available through each option.

Withdrawing money from your retirement plan also affects the amount of money you will accumulate over time. The graph below shows the consequences of withdrawing money from your pension plan and not depositing it in another qualified plan within the required time limit.

As the graph shows, your pension keeps the full amount it earns through investments because its earnings are not fully taxed (until you receive a distribution). As a result, pension accounts can grow faster than comparable taxable accounts (see graph). Let's say, for instance, that you have $10,000 in a pension account or IRA, and it earns an average return on investment of 10 percent. In 20 years it will grow, with compounding, to $67,300. If you withdraw this amount after you reach age 59 = (the age at which you can withdraw money without a 10 percent penalty) and pay 28 percent income tax on your withdrawal, you will keep $48,400.

On the other hand, if you close your pension account before age 59=, taxes will claim a portion of the funds you receive and will reduce your return every year thereafter. As a result, the value of your account after 20 years will be approximately $24,900, assuming the same rate of return and tax bracket. As shown in the graph, the tax consequences of early withdrawal will cost you 45 percent of your account balance at retirement.

Before you withdraw retirement funds, you may want to talk to your employer, bank, union or a financial advisor for practical advice about the long-term and the tax consequences.

If I am laid off, are my retirement funds safe?

Generally, your pension funds should not be at risk when a plant or business closes. Employers must comply with federal laws when establishing and running pension plans, and the consequences of not prudently managing pension plan assets are serious.

In addition, your pension benefits may be protected by the federal government. Traditional plans (defined benefit plans) are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal government corporation. If an employer has financial difficulty and cannot fund the plan, and the plan does not have enough money to pay the promised benefits, the PBGC will assume responsibility as trustee of the plan. The PBGC pays benefits up to a certain maximum guaranteed amount.

Defined contribution plans, on the other hand, are not insured by the PBGC.

To help employees monitor their retirement plans and thus ensure retirement security, PWBA has issued a list of ten warning signs that may indicate your pension plan has financial problems. They are included in the publication Protect Your Pension, listed at the end of this booklet.

If, for any reason, you suspect your pension benefits are not safe or are not prudently invested, you should pursue the issue with the PWBA regional office nearest you. The address and telephone number of each regional office are listed at the back of this booklet.

What if my company goes out of business and the pension plan terminates?

In a defined contribution plan, the plan administrator generally gathers certain pension plan and tax-related information and submits it to the IRS. This process may delay plan termination and subsequent payment of any benefits. You should contact your pension plan administrator for information on status and length of time before you receive your money.

In a defined benefit plan, the plan administrator generally files certain documents with the IRS and the PBGC. Once PBGC approves the termination, benefits are generally distributed in a lump sum or as an annuity within 1 year of termination.

Regardless of the type of benefit plan, you should know the name of the plan administrator. This information is contained in the latest copy of your summary plan description. If you can't find the name of your plan administrator, you may wish to contact your company's personnel department, your union representative (if there is a union) or the IRS or PBGC (in the case of most defined benefits plans).

If you do decide to contact one of these agencies, you may need to know your employer's identification number, or EIN, a 9-digit number used for tax purposes. The EIN can be found on last year's wage tax form (Form W-2). A PWBA regional office may be able to help you obtain this information.

What if the company declared bankruptcy?

If an employer declares bankruptcy, there are a number of choices as to what form the bankruptcy takes. A Chapter 11 (reorganization) bankruptcy may not have any effect on your pension plan and the plan may continue to exist. A Chapter 7 (final) bankruptcy, where the employer's company ceases to exist, is a more complicated matter.

Because each bankruptcy is unique, you should contact your pension plan administrator, your union representative or the bankruptcy trustee and request an explanation of the status of your pension plan.

In summary:

Know in advance the plan rules that govern the way your pension assets and health care benefits are treated if you are laid off. The following documents contain valuable information about your health care and pension plans and should be helpful to you as a dislocated worker. You should be able to obtain most of them from your plan administrator, union representative or human resource coordinator.Summary plan description - A brief description of your pension or health plan;Summary annual report - A summary of the plan's annual finances; the summary may contain names and addresses you may need to know;Enrollment forms listing you and/or your family members as participants in a plan;Earnings and leave statements;A certificate of creditable coverage (furnished by your former employer) - Informs your new employer that you had health coverage;Statements showing how much money is in your pension account or the value of your pension benefit.

You should save these documents. In addition, you should save any documents, such as memos or letters from your company, union or bank, that relate to your pension or health plans. They may prove valuable in protecting your pension and health benefit rights.

For More Information

The Pension and Welfare Benefits Administration offers more information on ERISA, COBRA and HIPAA. Additional information at http://www.dol.gov/dol/pwba Or call 1-800-998-7542

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