There are no laws that require companies to provide retirement benefits. However, if a company chooses to offer pension benefits to its employees, it must abide by the provisions of the Employee Retirement Income Security Act, known as “ERISA.” ERISA contains comprehensive requirements for employers who provide “qualified plans.” The law:
- Requires that employers provide plan participants with information about features offered, as well as how the plan will be funded
- Sets minimum standards for participation, vesting, accrual of benefits, and funding
- Establishes a claims and appeal process for participants
- Creates a fiduciary responsibility on behalf of those who manage plan assets
- Gives participants the right to take legal action to recover benefits or to sue for breach of fiduciary responsibility
- Guarantees payment of benefits through the federally funded Pension Benefit Guaranty Corporation (PBGC)
The Different Types of Pension Plans
Historically, companies have offered either defined-benefit or defined-contribution plans. The trend over the last half century has been away from defined benefit plans, with less than one in five companies offering those types of pensions.
Under a defined-benefit plan, the benefit an employee receives is normally calculated 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 account established by the employer. The funds are managed as a whole, and the benefits received may vary based on the performance of investments in the trust account.
Under a defined-contribution plan, the employer makes regular deposits into accounts set up for individual employees. The employer may make contributions independent of any requirement that the employee also contribute, but most “defined-contribution” plans involving before-tax contributions by employees, which are often matched at some level by employers. With a defined-contribution plan, the amount a participant receives at retirement typically depends on how much was contributed, and on the performance of investments within his or her personal portfolio.
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.
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