Connect With Us
To satisfy the general requirements, a qualified retirement plan must be permanent, meaning it cannot have a planned expiration date. Although the employer may reserve the right to change or terminate the plan or to discontinue operations, abandoning the plan for any reason other than business necessity within a few years is evidence that the plan was not a bona fide program from its inception.
The plan must be a definite written program that is communicated to all employees. All plan assets must be held in trust by one or more trustees. The plan must be for the exclusive benefit of the employees and their beneficiaries. Assets can't revert to the employer, except for forfeitures (for example, if an employee leaves before vesting in benefits). Funding can be provided from employer or employee contributions, or both.
Participation/coverage rules. To meet the minimum standards, at least a certain percentage of the non-highly-compensated employees must be covered by the plan and a certain number of those covered employees must actually be in the plan. The plan cannot discriminate in favor of employees who are officers, shareholders, or highly compensated, by making larger contributions on their behalf or providing them with better benefits. The plan may condition eligibility on age and service, but generally cannot postpone participation beyond the date the employee attains the age of 21 and the date on which the employee completes one year of service.
Vesting rules. The process of acquiring a nonforfeitable right to the money being set aside for you is called vesting, and means that you have to stick around in order to earn full benefits. There are two permitted vesting methods: five-year cliff vesting in which the participant becomes fully vested after five years of service (with zero vesting in the first four years) and seven-year gradual vesting in which the participant becomes increasingly vested (usually 20 percent per year) starting with the third year of service and becoming fully vested after seven years of service. Although the employer can have vesting rules more lenient than these, the rules cannot be more restrictive. An employee must become fully vested no later than the normal retirement age specified in the plan. The plan must also provide rules on how breaks in service affect vesting rights.
An accelerated vesting schedule applies to employer matching contributions to a defined contribution plan. An employer may choose either a three-year cliff vesting schedule, which provides 100 percent vesting after three years of employee service, or a two- to six-year graded vesting schedule, with 20 percent being vested after two years of service and each year thereafter.
When an employee leaves your business, you may "cash out" the employee's pension benefits if the vested portion of the benefits is equal to or less than $5,000. When the cash out amount is over $1,000, the distribution must automatically be rolled over directly to an IRA account designated by the employer unless the employee elects to have the distribution go elsewhere (i.e., another IRA, another qualified plan, or directly in the employee's pocket). This rule is intended to limit the temptation for employees to squander retirement savings when a cash out distribution occurs.
Required communications. Each year the employer must furnish a document called a Summary Plan Description, written in plain English understandable to the average plan participant, detailing the amount of pension benefits, requirements for receiving those payments, and any conditions that might prevent someone from receiving them.
Integration with Social Security. Many companies integrate their pension schemes with Social Security. This integration reduces your employer-provided pension benefit by a percentage of the amount of your Social Security benefit. The employer argues that since it must pay over 7 percent in Social Security taxes and also fund the pension program, without integration it is supporting two pension systems. However, although a certain degree of integration is allowed by law, an employee must be guaranteed at least 50 percent of the pension he or she earned when Social Security is merged with the pension.