Pension: Retirement and Savings Plans
This page addresses the following topics:
8. Savings plan
10. Stock options
If you participated in a retirement plan, a pension plan, a 401(k) plan, a thrift savings plan, a profit-sharing plan, or any other type of deferred compensation plan, it is absolutely critical that you have all the documents that describe the plan and your participation in the plan, the status of your account, and how your termination affects your participation in these plans. One important document to which you are entitled is the summary plan description. Another is the individual benefit statement which tells if you are vested and lists your accrued benefits-the amount of your pension at age 65. Study all plan documents thoroughly. Talk to human resources personnel. But you should not rely on oral promises. If there is any doubt concerning your rights, write to the plan administrator for a written explanation. If you do not receive a satisfactory response, contact a lawyer.
Defined Benefit Plans set forth a promise to pay a specific amount of money per month upon retirement-$800.00 a month at age 65, for example. The amount of monthly retirement income is usually determined by a formula based on a years of service and earnings. The employer makes an annual cash contribution to the pension fund based on estimates of what it will cost to pay benefits in the future.
Defined Contribution Plans require the employer to deposit a certain amount of money annually into an individual account of each employee. The amount in the account will change depending upon investment gains and losses, including interest and dividend payments. At retirement, the employee receives whatever monies are in the account in a lump sum.
Pension plans generally require that participants reach a certain age, such as 62, or 65, before they can begin receiving a full retirement pension. However, most plans permit early retirement and receipt of monthly income at a younger age, such as 55, 60, or 62, but at a reduced monthly rate. If you are terminated, you may, depending upon your age, still be eligible to receive reduced early retirement benefits. You should check the amount of pension reduction or penalty for early withdrawal. Sometimes it may be to your advantage to defer receiving retirement benefits until age 65.
Employees have no legal right to any benefit until they are vested. Vesting means the individual's "interest" in the plan is non-forfeitable and cannot be taken away. Vesting occurs after an employee has worked a minimum period of time as set forth in the plan. Federal law requires 100% vesting:
- After five years with no vesting prior to five years service; or
- Under a three-to-seven year schedule, where a percentage is vested each year and 100% is vested after seven years.
You are always 100% vested in the funds which you have personally contributed to the plan through payroll deduction or otherwise. Being 100% vested, however, does not mean you are entitled to 100% of the full and final pension benefit you would receive if you worked until age 65. Being vested only entitles you to receive at normal retirement age the full amount of benefit accumulated at the time of your termination.
There is no law giving you the right to receive the vested amount of your pension in a lump sum. Instead, payment will be governed by the terms of distribution set forth in the plan.
The Employee Retirement Income Security Act of 1974 (ERISA) regulates pension plans. If your employer breaches ERISA or the terms of the pension plan, you have the right to file suit under federal law. For many violations, you must first file a claim under the internal system of appeals set forth in your pension plan before you can go to court. If you have questions concerning pension plans, you should consult a lawyer, accountant, actuary, or other pension expert.
All employer contributions to your retirement or savings plan will cease upon termination. You will most likely be unable to make additional contributions. If you have not been employed for very long with your employer, you might lose all benefits that had been built up, unless you are vested.
Check the terms of the plan to see if there is any event or time period which is upcoming in the near future which would permit you to qualify for a larger benefit (the date when you would accumulate another year of service, for example). Ask if there is some way for you to stay on the payroll or otherwise obtain credit for an additional year of service in order to enhance your benefits.
For savings plans other than pension or retirement plans, different rules apply. When you can make withdrawals from the account and the consequences of doing so are not linked to age, but to other factors such as length of participation in the plan or length of employment. If you participated in a savings plan in which your employer matched funds that you contributed, you are entitled to the amount of money that you contributed, but you may lose the employer's matching funds, depending on how long you have been in the plan.
Most savings plans do not require you to withdraw the funds in your account upon termination. The funds can remain in the employer's plan, and some, such as 401(k) plans, will continue to grow through reinvestment. Again, except in rare cases, all employer contributions will cease. Whether you can continue your contributions depends on the plan.
Consider all the options before taking money out of your plan. You must decide for yourself whether you need money badly enough now to dip into your account and possibly incur a penalty. You can sometimes take all of the money out of your account with your employer and put it into a private Individual Retirement Account (IRA) without incurring a penalty and without paying taxes on the amount you take out. This so-called "roll over" must be made within a certain time period set by law. Currently, the law allows sixty days from the date funds are taken out of your company account before the funds must be deposited into an IRA. Check with your financial institution abut specific amounts and the penalties associated with taking that money out early.. You may also want to consult a financial advisor on how best to reinvest this money.
Sometimes your pension account contains shares of employer stock or stock in other companies. Often you are better off not selling the stock at the time of termination, but rolling over and transferring the stock to your own personal IRA retirement account with a bank or stock broker.
You might want to leave your pension intact to assure yourself of a steady income at retirement. Defined benefit retirement plans, unlike savings plans, will generally not get any larger with the passage of time. AT the time of your termination, you should get an estimate of what your monthly pension benefit will be when you reach the retirement age and what it would be if you began receiving the pension earlier.
Finally, remember that you will be taxed on the money that you withdraw from your pension or savings account. This tax is in addition to any penalty or reduction in benefit imposed for early withdrawal from your account.
Your right to exercise stock options is most likely limited by the termination of your employment. Often, you will forfeit the right to exercise the options - that is, to purchase-shares at the price set in the option if you were terminated for cause. If you were terminated for any other reason, the time you have to exercise the options will be very short.
One aspect of your employer's financial responsibility to you includes your wages. Two federal laws, the Equal Pay Act and the Fair Labor Standards Act, require employers to pay employees in a certain manner. The Equal Pay Act requires that men and women performing substantially equal work must be paid equally. The Fair Labor Standards act requires time and one half be paid for work over 40 hours in a week for "non-exempt" employees. The termination of your employment is a critical time to reflect on these financial matters. If you suspect that you were not paid in accordance with these laws at any time during your employment, contact an attorney or the Department of Labor to try to obtain any past amounts that may be coming to you. Time is of the essence in pursuing these claims.
This is a selection from Job Rights and Survival Strategies by Paul H. Tobias and Susan Sauter.
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