Los Angeles Divorce Attorney Property Division in California RETIREMENT PLANS FAQs The information contained in these FAQs is general information related to retirement plans. It is not specific legal advice and our office does not furnish pension advice to clients. Because this is such a complex area of law that requires pension expertise, our office always advises clients to retain a pension/QDRO expert to handle any pension matters in their dissolution and draft a QDRO(s), if necessary. If you have any questions regarding pensions our office can make referrals to pension experts. Information provided here covers private retirement plans that are governed by Federal laws and guidelines in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. ERISA is a Federal statute that sets standards for most employer and union sponsored retirement plans in private industry and imposes responsibilities on those running the plan. Participants in these plans have certain rights as well as responsibilities. The rules discussed here do not apply to all retirement plans. For example, the information does not apply to:
The information contained here answers the most common questions about retirement plans. Keep in mind, however, that the information here is a simplified summary of participant rights and responsibilities, not a legal interpretation of ERISA. 1. Types Of Retirement Plans 2. Earning Retirement Benefits 3. Plan Information To Review 4. Payment Of Benefits 5. Taking Your Retirement Benefit With You 6. Your Benefit During A Plan Termination Or Company Merger 7. Divorce - Claims Against Your Benefit 1. Types Of Retirement Plans The first step to understanding your retirement benefits is to find out what kind of retirement plan your or your spouse's employer has. There are two major types of plans, defined benefit and defined contribution. Keep in mind that the employer may have more than one type of plan, and may have different participation requirements for each. A defined benefit plan, funded by the employer, promises you a specific monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more often, it may calculate your benefit through a formula that includes factors such as your salary, your age, and the number of years you worked at the company. For example, your pension benefit might be equal to 1 percent of your average salary for the last 5 years of employment times your total years of service. A defined contribution plan, on the other hand, does not promise you a specific benefit amount at retirement. Instead, you and/or your employer contribute money to your individual account in the plan. In many cases, you are responsible for choosing how these contributions are invested, and deciding how much to contribute from your paycheck through pretax deductions. Your employer may add to your account, in some cases by matching a certain percentage of your contributions. The value of your account depends on how much is contributed and how well the investments perform. At retirement, you receive the balance in your account, reflecting the contributions, investment gains or losses, and any fees charged against your account. The 401(k) plan is a popular type of defined contribution plan, and there are three types of 401(k) plans: traditional, SIMPLE 401(k), and Safe Harbor 401(k) plans. The SIMPLE-IRA plan, SEP, employee stock ownership plan (ESOP), and profit-sharing plan are other examples of defined contribution plans. (see Characteristics Of Defined Benefit And Defined Contribution Plans) Note
employers to offer or to continue to offer a plan. 2. The Pension Benefit Guaranty Corporation (PBGC) guarantees payment of certain retirement benefits for participants in most private defined benefit plans if the plan is terminated without enough money to pay all of the promised benefits. The government does not guarantee benefit payments for defined contribution plans. For more information, see the PBGC’s Web site. 3. Some hybrid plans – such as cash balance plans – contain features of both types of plans described above. 2. Earning Retirement Benefits Once you have learned what type of retirement plan you or your spouse has, you need to find out when you or your spouse started to participate in the plan and when benefits begun. Plan rules can vary as long as they meet the requirements under Federal law. You need to check with the plan or review the plan booklet (Summary Plan Description) to learn plan’s rules and requirements. Your plan may require you to work for the company for a period of time before you may participate in the plan. In addition, there typically is a time frame for when you begin to accumulate benefits and earn the right to them (sometimes referred to as “vesting”). When do you begin to accumulate benefits? Once you begin to participate in a retirement plan, you need to understand how you accrue or earn benefits. Your accrued benefit is the amount of retirement benefits that you have accumulated or that have been allocated to you under the plan at any particular point in time. Defined benefit plans often count your years of service in order to determine whether you have earned a benefit and also to calculate how much you will receive in benefits at retirement. Employees in the plan who work part-time, but who work 1,000 hours or more each year, must be credited with a portion of the benefit in proportion to what they would have earned if they were employed full time. In a defined contribution plan, your benefit accrual is the amount of contributions and earnings that have accumulated in your 401(k) or other retirement plan account, minus any fees charged to your account by your plan. Special rules for when you begin to accumulate benefits may apply to certain types of retirement plans. For example, in a Simplified Employee Pension Plan (SEP), all participants who earn at least $450 a year from their employers are entitled to receive a contribution. Can a plan reduce promised benefits? Defined benefit plans may change the rate at which you earn future benefits but cannot reduce the amount of benefits you have already accumulated. For example, a plan that accrues benefits at the rate of $5 a month for years of service through 2006 may be amended to provide that for years of service beginning in 2007 benefits will be credited at the rate of $4 per month. Plans that make a significant reduction in the rate at which benefits accumulate must provide you with written notice generally at least 15 days before the change goes into effect. Also, in most situations, if a company terminates a defined benefit plan that does not have enough funding to pay all of the promised benefits, the Pension Benefit Guaranty Corporation will pay plan participants and beneficiaries some retirement benefits, but possibly less than the level of benefits promised. In a defined contribution plan, the employer may change the amount of employer contributions in the future. Depending on the plan terms, the employer may also be able to stop making contributions for a few years or indefinitely. Finally, an employer may terminate a defined benefit or a defined contribution plan, but may not reduce the benefit you have already accrued in the plan. How soon do you have a right to your accumulated benefits? You immediately vest in your own contributions and the earnings on them. This means you have earned the right to these amounts without the risk of forfeiting them. But note – there are restrictions on actually taking them out of the plan. See the discussion on the rules for distributions later in this booklet. However, you do not necessarily have an immediate right to any contributions made by your employer. Federal law provides a maximum number of years a company may require employees to work to earn the vested right to all or some of these benefits. (See vesting rules). In a defined benefit plan, an employer can require that employees have 5 years of service in order to become vested in the employer funded benefits. Employers also can choose a graduated vesting schedule, which requires an employee to work 7 years in order to be 100 percent vested, but provides at least 20 percent vesting after 3 years, 40 percent after 4 years, 60 percent after 5 years, and 80 percent after 6 years of service. The permitted vesting schedules for current defined benefit plans are shown in Table 3 below. Plans may provide a different schedule as long as it is more generous than these vesting schedules. In a defined contribution plan such as a 401(k) plan, you are always 100 percent vested in your own contributions to a plan, and in any subsequent earnings from your contributions. However, in most defined contribution plans you may have to work several years before you are vested in the employer’s matching contributions. (There are exceptions, such as the SIMPLE 401(k) and the Safe Harbor 401(k), in which you are immediately vested in all required employer contributions.) Currently, employers have a choice of 2 different vesting schedules for employer matching 401(k) contributions, which are shown in Table 2. Your employer may use a schedule in which employees are 100 percent vested in employer contribution after 3 years of service, called cliff vesting. Under graduated vesting, an employee must be at least 20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years. You may lose some of the employer-provided benefits you have earned if you leave your job before you have worked long enough to be vested. However, once vested, you have the right to receive the vested portion of your benefits even if you leave your job before retirement. But even though you have the right to certain benefits, your defined contribution plan account value could decrease after you leave your job as a result of investment performance. (see Vesting Rules) 3. Plan Information To Review If you have a question about your or your spouse's retirement plan, you can start by looking for an answer in the information that the plan provides. You can request this information from a plan administrator, the person who is in charge of running the plan. The employer can tell you how to contact the plan administrator. Information Provided By The Retirement Plan Each retirement plan is required to have a formal, written plan document that details how it operates and its requirements. As noted previously, there is also a booklet that describes the key plan rules, called the Summary Plan Description (SPD), which should be much easier to read and understand. The SPD should include a summary of any material changes to the plan or to the information required to be in the SPD. In many cases, you can start with the SPD and then look at the plan document if you still have questions. In addition, plans must provide you with a number of notices. For example, defined contribution plans, such as 401(k) plans, generally are required to provide advance notice to employees when a “blackout period” occurs. A blackout period is when a participant’s right to direct investments, take loans, or obtain distributions is suspended for a period of at least three consecutive business days. Blackout periods can often occur when plans change recordkeepers or investment options. Some plan information, such as the Summary Plan Description, must be provided to you automatically and without charge at the time periods indicated below. You may request a Summary Plan Description at other times, but your employer might charge you a copying fee. You must ask the plan if you want other information, such as a copy of the written plan document or the plan’s Form 5500 annual financial report, and you may have to pay a copying fee. See Retirement Plan Key Information. Many employers provide benefit information on a Web site. In some cases, plans provide information more frequently than required by Federal law. For instance, many large defined contribution plans provide quarterly benefit statements, and some plans allow participants to check their statements online or by telephone. The plan’s annual financial report (Form 5500) is also available (there is a copying fee if over 100 pages) by contacting the U.S. Department of Labor, EBSA Public Disclosure Facility, Room N-1513, 200 Constitution Avenue, NW, Washington, D.C. 20210, Tel: 202.693.8673. In addition, if your plan administrator does not provide you, as a participant covered under the plan, with a copy of the Summary Plan Description automatically or after you request it, you may contact the Department of Labor toll free at 1.866.444.EBSA (3272) for help. 4. Payment Of Benefits Once you understand what type of plan you or your spouse have, how you/spouse earn benefits, and how much your/spouse's benefits will be, it is important to learn when and how you can receive them. When can you begin to receive retirement benefits? There are several points to keep in mind in determining when you can receive benefits: Federal law provides guidelines, for when plans must start paying retirement benefits. Plans can choose to start paying benefits sooner. The plan documents will state when you may begin receiving payments from the plan. You must file a claim for benefits for your payments to begin. This takes some time for administrative reasons. Under certain circumstances, your benefit payments may be suspended if you continue to work beyond normal retirement age. The plan must notify you of the suspension during the first calendar month or payroll period in which payments are withheld. This information should also be included in the Summary Plan Description. A plan also must advise you of its procedures for requesting an advance determination of whether a particular type of reemployment would result in a suspension of benefit payments. If you are a retiree and are considering taking a job, you may wish to write to your plan administrator and ask if your benefits would be suspended. Federal law guidelines show the general requirements for when payments begin. Listed below are some permitted variations:
When is the latest you may begin to take payment of your benefits? Federal law sets a mandatory date by which you must start receiving your retirement benefits, even if you would like to wait longer. This mandatory start date generally is set to begin on April 1 following the calendar year in which you turn 70½ or, if later, when you retire. However, your plan may require you to begin receiving distributions even if you have not retired by age 70½. In what form will your benefits be paid? If you are in a defined benefit or money purchase plan, the plan must offer you a benefit in the form of a life annuity, which means that you will receive equal, periodic payments, often as a monthly benefit, which will continue for the rest of your life. Defined benefit and money purchase plans may also offer other payment options, so check with the plan. If you are in a defined contribution plan (other than a money purchase plan), the plan may pay your benefits in a single lump-sum payment as well as offer other options, including payments over a set period of time (such as 5 or 10 years) or an annuity with monthly lifetime payments. Can a benefit continue for your spouse should you die first? In a defined benefit or money purchase plan, unless you and your spouse choose otherwise, the form of payment will include a survivor’s benefit. This survivor’s benefit, called a qualified joint and survivor annuity (QJSA), will provide payments over your lifetime and your spouse’s lifetime. The benefit payment that your surviving spouse receives must be at least half of the benefit payment you received during your joint lives. If you choose not to receive the survivor’s benefit, both you and your spouse must receive a written explanation of the QJSA and, within certain time limits, you must make a written waiver and your spouse must sign a written consent to the alternative payment form without a survivor’s benefit. Your spouse’s signature must be witnessed by a notary or plan representative. In most 401(k) plans and other defined contribution plans the plan is written so different protections apply for surviving spouses. In general, in most defined contribution plans if you should die before you receive your benefits, your surviving spouse will automatically receive them. If you wish to select a different beneficiary, your spouse must consent by signing a waiver, witnessed by a notary or plan representative. If you were single when you enrolled in the plan and subsequently married, it is important that you notify your employer and/or plan administrator and change your status under the plan. If you do not have a spouse, it is important to name a beneficiary. If you or your spouse left employment prior to January 1, 1985, different rules apply. For more information on these rules, contact the Department of Labor toll free at 1.866.444.EBSA (3272). Can you borrow from your 401(k) plan account? 401(k) plans are permitted to – but not required to – offer loans to participants. The loans must charge a reasonable rate of interest and be adequately secured. The plan must include a procedure for applying for the loans and the plan’s policy for granting them. Loan amounts are limited to the lesser of 50% of your account balance or $50,000 and must be repaid within 5 years, or 15 years for residential loans. Can you get a distribution from your plan if you are not yet 65 or your plan’s normal retirement age but are facing a significant financial hardship? Again, defined contribution plans are permitted to – but not required to – provide distributions in case of hardship. Check your plan booklet to see if it does permit them and what circumstances are included as hardships. 5. Taking Your Retirement Benefit With You If you leave an employer before you reach retirement age, whether or not you can take your benefits out and/or roll them into another tax-qualified plan or account will depend on what type of plan you are in. If you leave before retirement, can you take your retirement benefit with you? If you are in a defined benefit plan (other than a cash balance plan), you most likely will be required to leave the benefits with the retirement plan until you become eligible to receive them. As a result, it is very important that you update your personal information with the plan administrator regularly and keep current on any changes in your former employer’s ownership or address. If you are in a cash balance plan, you probably will have the option of transferring at least a portion of your account balance to an individual retirement account or to a new employer’s plan. If you leave your employer before retirement age and you are in a defined contribution plan (such as a 401(k) plan), in most cases you will be able to transfer your account balance out of your employer’s plan. What choices do you have for taking your defined contribution benefits? A lump sum – you can choose to receive your benefits as a single payment from your plan, effectively cashing out your account. You may need to pay income taxes on the amount you receive, and possibly a penalty. A rollover to another retirement plan – you can ask your employer to transfer your account balance directly to your new employer’s plan if it accepts such transfers. A rollover to an IRA – you can ask your employer to transfer your account balance directly to an individual retirement account (IRA). If your account balance is less than $5,000 when you leave the employer, the plan can make an immediate distribution without your consent. If this distribution is more than $1,000, the plan must automatically roll the funds into an IRA it selects, unless you elect to receive a lump sum payment or to roll it over into an IRA you choose. The plan must first send you a notice allowing you to make other arrangements, and it must follow rules regarding what type of IRA can be used (i.e. it cannot combine the distribution with savings you have deposited directly in an IRA). Rollovers must be made to an entity that is qualified to offer individual retirement plans. Also, the rollover IRA must have investments designed to preserve principal. The IRA provider may not charge more in fees and expenses for such plans than it would to its other individual retirement plan customers. Please note: If you elect a lump sum payment and do not transfer the money to another retirement account (employer plan or IRA other than a Roth IRA), you will owe a tax penalty if you are under age 59½ and do not meet certain exceptions. In addition, you may have less to live on during your retirement. Transferring your retirement plan account balance to another plan or an IRA when you leave your job will protect the tax advantages of your account and preserve the benefits for retirement. What happens if you leave a job and later return? If you leave an employer for whom you have worked for several years and later return, you may be able to count those earlier years toward vesting. Generally, a plan must preserve the service credit you have accumulated if you leave your employer and then return within five years. Service credit refers to the years of service that count towards vesting. Because these rules are very specific, you should read your plan document carefully if you are contemplating a short-term break from your employer, and then discuss it with your plan administrator. If you left employment prior to January 1, 1985, different rules apply. If you retire and later go back to work for a former employer, you must be allowed to continue to accrue additional benefits, subject to a plan limit on the total years of service credited under the plan. 6. Your/Your Spouse's Benefit During A Plan Termination Or Company Merger As noted at the beginning of this booklet, employers are not required to offer a retirement plan and plans can be modified and/or terminated. What happens when a plan is terminated? Federal law provides some measures to protect employees who participated in plans that are terminated, both defined benefit and defined contribution. When a plan is terminated, the current employees must become 100 percent vested in their accrued benefits. This means you have a right to all the benefits that you have earned at the time of the plan termination, even benefits in which you were not vested and would have lost if you had left the employer. If there is a partial termination of a plan, for example, if your employer closes a particular plant or division that results in the end of employment of a substantial percentage of plan participants, the affected employees must be immediately 100 percent vested to the extent the plan is funded. What if your terminated defined benefit plan does not have enough money to pay the benefits? The Federal government, through the Pension Benefit Guaranty Corporation (PBGC), insures most private defined benefit plans. For terminated defined benefit plans with insufficient money to pay all of the benefits, the PBGC will guarantee the payment of your vested pension benefits up to the limits set by law. For further information on plan termination guarantees, contact the Pension Benefit Guaranty Corporation toll free at 1.800.400.7242, or visit the Web site. What happens if a defined contribution plan is terminated? The PBGC does not guarantee benefits for defined contribution plans. If you are in a defined contribution plan that is in the process of terminating, the plan fiduciaries and trustees should take actions to maintain the plan until they terminate it and pay out the assets. Is your accrued benefit protected if your plan merges with another plan? Your plan rules and investment choices are likely to change if your company merges with another. Your employer may choose to merge your plan with another plan. If your plan is terminated as a result of the merger, the benefits that you have accrued cannot be reduced. You must receive a benefit that is at least equal to the benefit you were entitled to before the merger. In a defined contribution plan, the value of your account may still fluctuate after the merger based on the performance of the investments. Special rules apply to mergers of multiemployer defined benefit plans, which generally are under the jurisdiction of the PBGC. Contact the PBGC for further information. What if your/spouse's employer goes bankrupt? Generally, your retirement assets should not be at risk if your employer declares bankruptcy . Federal law requires that retirement plans fund promised benefits adequately and keep plan assets separate from the employer’s business assets. The funds must be held in trust or invested in an insurance contract. The employers’ creditors cannot make a claim on retirement plan funds. However, it is a good idea to confirm that any contributions your employer deducts from your paycheck are forwarded to the plan’s trust or insurance contract in a timely manner. Significant business events such as bankruptcies, mergers, and acquisitions can result in employers abandoning their individual account plans (e.g., 401(k) plans), leaving no plan fiduciary to manage it. In this situation, participants often have great difficulty in accessing the benefits they have earned and have no one to contact with questions. Custodians such as banks, insurers, and mutual fund companies are left holding the assets of these plans but do not have the authority to terminate the plans and distribute the assets. In response, the Department of Labor issued rules to create a voluntary process for the custodian to wind up the plan’s business so that benefit distributions can be made and the plan terminated. Information about this program can be found on the Department’s Web site at www.dol. gov/ebsa. 7. Potential Claims Against Your Benefit (Divorce) In general, your retirement plan is safe from claims by other people. Creditors to whom you owe money cannot make a claim against funds that you have in a retirement plan. For example, if you leave your employer and transfer your 401(k) account into an individual retirement account (IRA), creditors generally cannot get access to those IRA funds even if you declare bankruptcy. Federal law does make an exception for family support and the division of property at divorce. A state court can award part or all of a participant's retirement benefit to the spouse, former spouse, child, or other dependent. The recipient named in the order is called the alternate payee. The court issues a specific court order, called a domestic relations order, which can be in the form of a state court judgment, decree or order, or court approval of a property settlement agreement. The order must relate to child support, alimony, or marital property rights, and must be made under state domestic relations law. The plan administrator determines if the order is a qualified domestic relations order (QDRO) under the plan’s procedures and then notifies the participant and the alternate payee. If the participant is still employed, a QDRO can require payment to the alternate payee to begin on or after the participant’ s earliest possible retirement age available under the plan. These rules apply to both defined benefit and defined contribution plans. (see QDROs) Contact a Los Angeles Divorce Attorney at Law Offices of Warren R. Shiell to discuss your property division issues. Please call to make an appointment at 310.247.9913. ADDITIONAL RESOURCES
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