Upon retirement, workers may continue to receive monetary compensation from their employer in the form of a pension. The two main types of pensions are defined-benefit and defined-contribution.
Under a defined-benefit plan, the benefit an employee receives normally is based on the length of employment and the wages received. Each employee does not have a separate account because the money is administered through a trust established by the employer. Under a defined-contribution plan, the employer makes regular deposits into an account established for each employee. The employee is not guaranteed to receive a given amount during retirement — only the amount in the account.
Pensions are governed primarily by federal statutory law. Congress passed the Employee Retirement Income Security Act in response to the mismanagement of funds in defined-benefit plans. All employers who engage in interstate commerce and provide defined-benefit plans must abide by the act’s guidelines. The act does not apply to defined-contribution plans.
Under the act, employers must:
The act outlines which employees must receive a pension. It requires the pension plan to provide benefits to an employee’s survivors upon death. The act also establishes the Pension Benefit Guaranty Corporation to insure defined-benefit pension plans. Employers must pay premiums so that their plans are covered by this insurance. The termination of plans also is regulated extensively.
To encourage employers to provide pension plans that follow federally established guidelines, Congress authorized tax breaks to employers who follow the guidelines. Title 26 of the Internal Revenue Code establishes the requirements employers need to receive special tax treatment.
The content on this page was developed in partnership with the Legal Information Institute, Cornell Law School.