Employee Pension Plans 101

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Employee Pension Plans 101 Powered By Docstoc
					This is a comprehensive guide to employee pension plans that outlines and describes
the different types of pension plans. This document contains a full list of glossary terms
and provides an overview of how pension plans are structured and work. This
document is helpful to a company, human resource officer, or small business owner that
is looking for general information about the structure and workings of employee pension
plans.
Employee Pension
   Plans 101
                                           Employee Pension Plans 101
                                                        Table of Contents


Types of Pension Plans.................................................................................................................... 3
   Defined Benefit Plan.................................................................................................................... 3
   Defined Contribution Plan........................................................................................................... 3
   Traditional Individual Retirement Account (IRA). ....................................................................... 4
   Roth Individual Retirement Account. .......................................................................................... 4
   Simplified Employee Pension Individual Retirement Account.................................................... 4
   Savings Incentive Match Plan for Employees (Simple) Individual Retirement Account. ............ 4
   Qualified Plans............................................................................................................................. 4
   403(b) Accounts. ......................................................................................................................... 4
   401(k) Plan................................................................................................................................... 4
Glossary of Terms ........................................................................................................................... 4
   Benefit Accrual ............................................................................................................................ 5
   Cash Balance Plan........................................................................................................................ 5
   Defined Benefit Plan.................................................................................................................... 5
   Defined Contribution Plan........................................................................................................... 5
   Employee Retirement Income Security Act of 1974 (ERISA) ...................................................... 5
   Employee Stock Ownership Plan (ESOP) ..................................................................................... 5
   Individual Retirement Account (IRA)........................................................................................... 6
   Money Purchase Plan .................................................................................................................. 6
   Multiemployer Plan ..................................................................................................................... 6
   Plan Administrator ...................................................................................................................... 6
   Plan Document ............................................................................................................................ 6
   Plan Fiduciary .............................................................................................................................. 6
   Plan Trustee................................................................................................................................. 6
   Plan Year ...................................................................................................................................... 7

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   Profit-Sharing Plan....................................................................................................................... 7
   Rollover ....................................................................................................................................... 7
   Safe Harbor 401(k) ...................................................................................................................... 7
   Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) .............................. 7
   Simplified Employee Pension Plan (SEP) ..................................................................................... 7
   Summary Plan Description .......................................................................................................... 8
   Vested Benefits ........................................................................................................................... 8
   Years of Service ........................................................................................................................... 8
Basic Structure of a Pension Plan ................................................................................................... 8
   References: ................................................................................................................................ 14




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                                Employee Pension Plans 101
                              Basics of Structuring a Pension Plan




  Types of Pension Plans


The two overriding genres of pension plans are:

Defined Benefit Plan
This type of plan is funded by an employer and provides for a specific dollar amount to be paid
out (usually monthly) during retirement. The amount is generally determined using a formula
that takes into account the employee’s salary, age and tenure with the organization.

Defined Contribution Plan
Both employer and employee contribute to this plan over the course of the employee’s career,
and it does not guarantee a specific monthly amount to be paid to the employee on retirement,
but rather pays out the balance that the account has accrued on retirement.

Both types of plans are voluntary, and nothing requires an employer to offer a pension or
retirement plan or even to continue one that was previously offered.

The differences between these two types of plans are summarized in the table below.

                                   Defined Benefit Plan                  Defined Contribution Plan
Employer Contributions             Employer funded.                      Employee funded, but employer may
Matching Contributions                                                   or may not contribute via a matching
                                                                         program.
Employee Contributions             No                                    Yes
Investment Management              Plan officials manage.                Plan officials manage with input
                                                                         from employees; or employees
                                                                         manage.
Retirement Payout Amounts          Set amount determined by specific     Based on how much employee
                                   formula.                              contributes.
Retirement Payout Structure        Usually monthly annuities.            Usually lump sum, but sometimes
                                                                         offered as an annuity.
Benefits Guarantee                 Guaranteed by federal government.     No federal guarantee.
Employee Changes Companies         Stays with the company until          Employee may transfer to another
                                   employee files for whatever portion   plan, including another employer’s
                                   is due him or her.                    plan.



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The most common pension plans include the following:

       Traditional Individual Retirement Account (IRA).

       This is a tax-deferred account that permits a person to make
       deposits during their working years and not pay taxes on that
       money until they are at a retirement age and begin to withdraw
       the money.

       Roth Individual Retirement Account.

       This type of account works much the same as a Traditional IRA; however the money
       remains tax-free forever.

       Simplified Employee Pension Individual Retirement Account.

       These IRA accounts are limited to those who are self-employed and to small businesses,
       and have very specific limits and requirements.

       Savings Incentive Match Plan for Employees (Simple) Individual Retirement Account.

       This IRA, too, is limited to small employers who can match up to three-percent of the
       contributions made by participating employees.

       Qualified Plans.

       These plans offer an added bonus to the employer – the ability to take certain tax credits
       for offering it to employees.

       403(b) Accounts.

       This is a retirement account that can be offered by non-profit organizations to its
       employees.


       Glossary of Terms


The following is a glossary of the terms most commonly used related to pension plans. It is
reprinted here with the permission of the United States Department of Labor.

       401(k) Plan
              In this type of defined contribution plan, the employee can make contributions
              from his or her paycheck before taxes are taken out. The contributions go into a
              401(k) account, with the employee often choosing the investments based on
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               options provided under the plan. In some plans, the employer also makes
               contributions, matching the employee’s contributions up to a certain percentage.
               SIMPLE and Safe Harbor 401(k) plans have additional employer contribution and
               vesting requirements.

       Benefit Accrual
       The amount of benefits accumulated under the plan.

                           Cash Balance Plan
                           A type of defined benefit plan that includes some elements that are
                           similar to a defined contribution plan because the benefit amount is
                           computed based on a formula using contribution and earning credits,
                           and each participant has a hypothetical account. Cash balance plans are
                           more likely than traditional defined benefit plans to make lump sum
       distributions. (For more information, see Frequently Asked Questions about Cash
       Balance Pension Plans on the Department of Labor’s Web site, at
       www.dol.gov/ebsa/faqs/.)

       Defined Benefit Plan
       This type of plan, also known as the traditional pension plan, promises the participant a
       specified monthly benefit at retirement. Often, the benefit is based on factors such as your
       salary, your age, and the number of years you worked for the employer.

       Defined Contribution Plan
       In a defined contribution plan, the employee and/or the employer contribute to the
       employee’s individual account under the plan. The employee often decides how their
       accounts are invested. The amount in the account at distribution includes the
       contributions and investment gains or losses, minus any investment and administrative
       fees. The contributions and earnings are not taxed until distribution. The value of the
       account will change based on the value and performance of the investments.

       Employee Retirement Income Security Act of 1974 (ERISA)
       A Federal law that sets standards of protection for individuals in most voluntarily
       established, private-sector retirement plans. ERISA requires plans to provide participants
       with plan information, including important facts about plan features and funding; sets
       minimum standards for participation, vesting, benefit accrual, and funding; provides
       fiduciary responsibilities for those who manage and control plan assets; requires plans to
       establish a claims and appeals process for participants to get benefits from their plans;
       gives participants the right to sue for benefits and breaches of fiduciary duty; and, if a
       defined benefit plan is terminated, guarantees payment of certain benefits through a
       federally chartered corporation, known as the Pension Benefit
       Guaranty Corporation (PBGC).

       Employee Stock Ownership Plan (ESOP)
       A type of defined contribution plan that is invested primarily in
       employer stock.
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       Individual Benefit Statement
       An individual benefit statement provides information about a participant’s retirement
       benefits, such as the total plan benefits earned and vested benefits, on a periodic basis.
       Additional information may be included depending upon the type of plan, such as how a
       401(k) plan account is invested.

       Individual Retirement Account (IRA)
       An individual account set up with a financial institution, such as a bank or a mutual fund
       company. Under Federal law, individuals may set aside personal savings up to a certain
       amount, and the investments grow, tax deferred. In addition, defined contribution plan
       participants can transfer money from an employer retirement plan to an IRA when
       leaving an employer. IRAs also can be part of an employer plan.

                                Money Purchase Plan
                                A money purchase plan requires set annual contributions from the
                                employer to individual accounts and is subject to other rules.

                           Multiemployer Plan
                           A retirement plan sponsored by several employers under collective
                           bargaining agreements that meets certain other requirements. A
participant who changes jobs from one sponsoring employer to another stays within the same
plan.

       Plan Administrator
       The person who is identified in the plan document as having responsibility for running
       the plan. It could be the employer, a committee of employees, a company executive, or
       someone hired for that purpose.

       Plan Document
       A written instrument under which the plan is established and operated.

       Plan Fiduciary
       Anyone who exercises discretionary authority or discretionary control over management
       or administration of the plan, exercises any authority or control over management or
       disposition of plan assets, or gives investment advice for a fee or
       other compensation with respect to assets of the plan.

       Plan Trustee
       Someone who has the exclusive authority and discretion to manage
       and control the assets of the plan. The trustee can be subject to the
       direction of a named fiduciary and the named fiduciary can appoint
       one or more investment managers for the plan’s assets.

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       Plan Year
       A 12-month period designated by a retirement plan for calculating vesting and
       distribution, among other things. The plan year can be the calendar year or an alternative
       period, e.g., July 1 to June 30.

       Profit-Sharing Plan
       A profit-sharing plan allows the employer each year to determine how much to contribute
       to the plan (out of profits or otherwise) in cash or employer stock. The plan contains a
       formula for allocating the annual contribution among the participants.

       Rollover
       A rollover occurs when a participant leaves an employer and directs the defined
       contribution plan to transfer the money in his account to a new plan or individual
       retirement account. This preserves the benefits and does not trigger any tax consequences
       if done in a timely manner.


             Safe Harbor 401(k)
             A safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is
             required to make contributions for each employee. The employer contributions in
             Safe Harbor 401(k) plans are immediately 100 percent vested. The Safe Harbor
             401(k) eases administrative burdens on employers by eliminating some of the
             complex tax rules ordinarily applied to traditional 401(k) plans.


       Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)
       A plan in which a small business with 100 or fewer employees can offer retirement
       benefits through employee salary reductions and matching contributions (similar to those
       found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE 401(k). SIMPLE
       IRA plans impose few administrative burdens on employers because IRAs are owned by
       the employees and the bank or financial institution receiving the funds does most of the
       paperwork. While each has some different features, including contribution limits and the
       availability of loans, required employer contributions are immediately 100 percent vested
       in both.

       Simplified Employee Pension Plan (SEP)
       A plan in which the employer makes contributions on a tax-favored basis to individual
       retirement accounts (IRAs) owned by the employees. If certain conditions are met, the
       employer is not subject to the reporting and disclosure requirements of most retirement
       plans. Under a SEP, an IRA is set up by or for an employee to accept the employer’s
       contributions.

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       Summary Plan Description
       A document provided by the plan administrator that includes a plain language description
       of important features of the plan, e.g., when employees begin to participate in the plan,
       how service and benefits are calculated, when benefits become vested, when payment is
       received and in what form, and how to file a claim for benefits. Participants must be
       informed of material changes either through a revised Summary Plan Description or in a
       separate document called a Summary of Material Modifications.

       Vested Benefits
       Those benefits that the individual has earned a right to receive and that cannot be
       forfeited.

       Years of Service
       The time an individual has worked in a job covered by the plan. It is used to determine
       when an individual can participate and vest and how they can accrue benefits in the plan.

 Basic Structure of a Pension Plan

A pension plan is an extremely complex animal, and it is strongly recommended that companies
enlist the services of a professional actuary to help them create one and put the plan documents
in place. To select a respected and trustworthy actuarial company, start with one of these
organizations:
       Society of Actuaries
       American Academy of Actuaries
       Casualty Actuarial Society
The Social Security Administration is the governing body for actuarial entities. For more
information, you may contact The Office of the Chief Actuary.
We have provided below a sample table of contents for what a plan document should include, so
that you can compare what you receive from your actuary to what you believe your plan should
include.
ARTICLE I. NATURE OF PLAN

 1.1    Purpose
 1.2    Effective Date of Plan

ARTICLE II. DEFINITIONS AND CONSTRUCTION

 2.1    Accounts
 2.2    Accrued Benefit

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 2.3    Actual Deferral Percentage
 2.4    Actual Matching Percentage
 2.4A    Allocation Date
 2.5    Administration Committee or Committee
 2.6    Allocation Period
 2.7    Alternate Payee
 2.8    Annual Addition
 2.9    Beneficiary
 2.10   Break in Service
 2.11   Code
 2.12   Company
 2.13   Compensation
 2.14   Considered Compensation
 2.15   Deferral Limitation.
 2.16   Determination Year
 2.17   Disabled or Disability
 2.18   Early Retirement Age
 2.19   Eligibility Computation Period
 2.20   Eligibility Service
 2.21   Eligible Employee
 2.22   Employee
 2.23   Employee Contribution
 2.24   Employer
 2.25   Employment Commencement Date
 2.26   Employer Contribution
 2.27   ERISA
 2.28   Fiscal Year
 2.29   Forfeiture
 2.30   Former Participant
 2.31   Highly Compensated Employee
 2.32   Hour of Service
 2.33   Leave of Absence.
 2.34   Limitation Year
 2.35   Matching Contribution
 2.36   Nonelective Contribution
 2.37   Normal Retirement Age
 2.38   Parental Absence.
 2.39   Participant.
 2.40   Plan
 2.41   Plan Entry Date
 2.42   Plan Year
 2.43   Profit Sharing Contribution
 2.44   Qualified Domestic Relations Order
 2.45   Qualified Employer Contributions
 2.46   Re-Employed Employee
 2.47   Related Employer.
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 2.48    Related Plan
 2.49    Required Commencement Date
 2.50    Rollover Contribution
 2.51    Salary Deferral Contribution.
 2.52    Service
 2.53    Trust.
 2.54    Trust Agreement
 2.55    Trustee
 2.56    Valuation Date
 2.57    Vested Accrued Benefit
 2.58    Vesting Service

ARTICLE III. ELIGIBILITY AND PARTICIPATION

 3.1    Eligibility
 3.2    Eligibility Service.
 3.3    Participation - Re-Employed Employees
 3.4    Notice of Participation
 3.5    Rollover Contributions

ARTICLE IV. EMPLOYER CONTRIBUTIONS

 4.1    Employer Contributions
 4.2    Employer Contribution Limitation
 4.3    Determination of Contribution
 4.4    Time and Method of Payment of Contributions
 4.5    Limitations on Matching Contribution
 4.6    Return of Employer Contributions

ARTICLE V. PARTICIPANT CONTRIBUTIONS AND ROLLOVERS

 5.1    Participant Election to Defer Considered Compensation
 5.2    Limitation on Salary Deferral Contributions for Highly
        Compensated Employees
 5.3    Distribution of Excess Deferrals
 5.4    Rollover Contributions and Trust Transfers
 5.5    Employee Contributions

ARTICLE VI. ALLOCATIONS

 6.1    Participant's Accounts
 6.2    Charging of Payments and Distributions
 6.3    Allocation of Earnings to Accounts
 6.4    Allocation of Contributions
 6.5    Participants to Whom Nonelective Contributions Shall be Allocated
 6.6    Dates Contributions Considered Made
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 6.7    Allocation Does Not Create Rights
 6.8    Equitable Allocations
 6.9    Limitation on Annual Additions
 6.10   Special 410(b) Allocation
 6.11   Special Valuation

ARTICLE VII. TERMINATION OF SERVICE - PARTICIPANT VESTING

 7.1     Normal Retirement
 7.2     Early Retirement
 7.3     Disability
 7.4     Death
 7.5     Termination of Service Prior to Normal Retirement Age
 7.6     Years of Vesting Service
 7.7     Forfeiture Occurs and Restoration of Non-Vested Accrued Benefit
 7.8     Termination, Partial Termination, or Complete Discontinuance
        of Employer Contributions

ARTICLE VIII. TIME AND METHOD OF PAYMENT OF BENEFITS

 8.1    Time of Payment
 8.2    Method of Payment
 8.3    Deferral of Payments
 8.4    Involuntary and Voluntary Payments
 8.5    Qualified Domestic Relations Orders
 8.6    Payment in the Event of Legal Disability
 8.7    Accounts Charged.
 8.8    Payments Only from Trust
 8.9    Unclaimed Account Procedure
 8.10    Restrictions on Distributions
 8.11    Securities Law Restrictions

ARTICLE IX. IN-SERVICE WITHDRAWALS

 9.1    In-Service Withdrawal From Accounts
 9.2    Hardship Withdrawals
 9.3    Employee Contributions
 9.4    Pre-1987 Matching Contributions
 9.5    Age 59 1/2
 9.6    IBM/ISSC Transaction
 9.7    Loans Relating to Merged Plans

ARTICLE X. TOP HEAVY PLAN PROVISIONS

 10.1    Top Heavy Rules Applied
 10.2    Additional Definitions
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 10.3    Additional Limitation - Defined Benefit Plan
 10.4    Minimum Benefit
 10.5    Termination of Service Prior to Normal Retirement Age

ARTICLE XI. EMPLOYER ADMINISTRATIVE PROVISIONS

 11.1    Information
 11.2    No Liability
 11.3    Employer Action
 11.4    Indemnity
 11.5    Amendment to Vesting Schedule

ARTICLE XII. ADMINISTRATION COMMITTEE

 12.1    Appointment
 12.2    Term
 12.3    Compensation
 12.4    Powers of the Administration Committee
 12.5    Investment Powers
 12.6    Manner of Action
 12.7    Authorized Representative
 12.8    Exclusive Benefit
 12.9    Interested Member
 12.10    Funding Policy
 12.11    Books and Records

ARTICLE XIII. PARTICIPANT ADMINISTRATIVE PROVISIONS

 13.1    Beneficiary Designation
 13.2    No Beneficiary Designation
 13.3    Personal Data to Administration Committee
 13.4    Address for Notification
 13.5    Place of Payment and Proof of Continued Eligibility
 13.6    Alienation
 13.7    Litigation Against the Trust
 13.8    Information Available
 13.9    Beneficiary's Right to Information
 13.10    Claims Procedure
 13.11    Appeal Procedure for Denial of Benefits
 13.12    No Rights Implied

ARTICLE XIV. FIDUCIARY DUTIES

 14.1    Fiduciaries
 14.2    Allocation of Responsibilities
 14.3    Procedures for Delegation and Allocation of Responsibilities
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 14.4    Allocation of Fiduciary Liability

ARTICLE XV. DISCONTINUANCE AMENDMENT AND TERMINATION

 15.1    Discontinuance
 15.2    Amendment
 15.3    Termination
 15.4    Amendment Procedures
 15.5    Procedure on Termination
 15.6    Merger
 15.7    Notice of Change in Terms

ARTICLE XVI. THE TRUST

 16.1    Purpose of the Trust
 16.2    Appointment of Trustee
 16.3    Exclusive Benefit of Participants
 16.4    Benefits Supported Only By the Trust
 16.5    Rights to Trust Assets

ARTICLE XVII. MISCELLANEOUS

 17.1    Execution of Receipts and Releases
 17.2    No Guarantee of Interests
 17.3    Payment of Expenses
 17.4    Employer Records
 17.5    Interpretations and Adjustments
 17.6    Uniform Rules
 17.7    Evidence
 17.8    Severability
 17.9    Notice
 17.10    Waiver of Notice
 17.11    Successors
 17.12    Headings
 17.13    Governing Law

ARTICLE XVIII. EMPLOYER PARTICIPATION.

 18.1    Adoption by Employer
 18.2    Withdrawal by Employer
 18.3    Adoption Contingent Upon Initial and Continued Qualification
 18.4    No Joint Venture Implied




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References:

-   United States Department of Labor, Employee Benefits Security Administration

-   Employee Retirement Income Security Act of 1974 (ERISA)

-   Social Security Administration, Office of the Chief Actuary

-   OneCLE.com




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DOCUMENT INFO
Description: This is a comprehensive guide to employee pension plans that outlines and describes the different types of pension plans. This document contains a full list of glossary terms and provides an overview of how pension plans are structured and work. This document is helpful to a company, human resource officer, or small business owner that is looking for general information about the structure and workings of employee pension plans.
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