HRM textbook

CHAPTER 13 BENEFITS AND SERVICES 441
Pension Planning and the Law
No one wants to wake up and discover that his or her pension has vanished. Therefore,
federal laws regulate pension planning and administration. As a rule, it is impossible to
formulate a plan without expert help.
The Employee Retirement Income Security Act of 1975 (ERISA) is the basic law.
It requires that employers have written pension plan documents and adhere to certain
guidelines, such as regarding who is eligible for the employer s plan. 98 ERISA protects
the employer s pension or health plans assets by requiring that those who control the
plans act responsibly. The Department of Labor says that the primary responsibility
of fiduciaries is to run the plan solely in the interest of participants and beneficiaries.
Other laws are pertinent. Employers (and employees) want their pension contributions
to be qualified, or tax deductible, so they must adhere to the pertinent
income tax codes. Under labor relations laws, the employer must let its unions participate
in pension plan administration. The Job Creation and Worker Assistance Act
provides guidelines regarding what rates of return employers should use in computing
their pension plan values.
PBGC ERISA established the Pension Benefits Guarantee Corporation (PBGC)
to oversee and insure a pension if a plan terminates without sufficient funds.
The PBGC guarantees only defined benefit plans, not defined contribution plans.
Furthermore, it will only pay an individual a pension of up to a maximum of about
$54,000 per year for someone 65 years of age with a plan terminating in 2011. 99
So, high-income workers may still see most of their expected pensions evaporate
if their employers go bankrupt.
MEMBERSHIP REQUIREMENTS When does the employee become eligible for a
pension? Under the Tax Reform Act of 1986, an employer can require that an
employee complete a period of no more than 2 years service to the company before
becoming eligible to participate in the plan. However, if it requires more than 1 year
of service before eligibility, the plan must grant employees full and immediate vesting
rights at the end of that period.
VESTING Vested funds are the money employer and employee have placed in the
latter s pension fund that cannot be forfeited for any reason. The employees contributions
are always theirs, of course. However, until the passage of ERISA, the
employers contribution in many pension plans didn t vest until the employee retired.
So, you could have worked for a company for 30 years and been left with no pension
if the company went bust 1 year before you were to retire. That generally can t happen
today, given the PBGC s guarantees.
Employers can choose one of two minimum vesting schedules (employers can
allow funds to vest faster if they wish). With cliff vesting, the period for acquiring a
nonforfeitable right to employer matching contributions (if any) is 3 years. So, the
employee must have nonforfeitable rights to these funds by the end of 3 years. With the
savings and thrift plan
Plan in which employees contribute a portion
of their earnings to a fund; the employer
usually matches this contribution in whole
or in part.
deferred profit-sharing plan
A plan in which a certain amount of profits
is credited to each employee s account,
payable at retirement, termination, or death.
employee stock ownership plan (ESOP)
A qualified, tax-deductible stock bonus plan
in which employers contribute stock to a
trust for eventual use by employees.
cash balance plans
Plans under which the employer contributes
a percentage of employees current pay
to employees pension plans every year,
and employees earn interest on this amount.
Employee Retirement Income Security Act
(ERISA)
Signed into law by President Ford in 1974
to require that pension rights be vested
and protected by a government agency,
the PBGC.
Pension Benefits Guarantee
Corporation (PBGC)
Established under ERISA to ensure that
pensions meet vesting obligations; also
insures pensions should a plan terminate
without sufficient funds to meet its vested
obligations.