Accrual, Vesting, and Forfeiture of Pension Plans under ERISA
The Employee Retirement Income Security Act (ERISA) is a federal law that regulates certain employee benefits such as health plans and pension plans and specifies certain minimum standards for those plans. ERISA provides certain reporting and disclosure requirements and imposes fiduciary responsibility on the administrators of ERISA-governed plans.
ERISA establishes minimum standards for the rates at which pension benefits accrue and when an employee becomes vested in a pension plan. Although an employee will always own the contributions that he or she contributes to his or her account, an employee is said to be vested in a plan after a certain time when the employee’s rights to the employer’s contribution to the employee’s pension account becomes irrevocable. An employer with an ERISA-governed plan has three choices in how to count an employee’s service for the purposes of determining eligibility for the plan and for accrual of benefits: (1) the general method of counting service; (2) a simplified equivalency method; or (3) the elapsed time method.
In general, an employer must require no more than a year of service in order to become a participant in a plan, although an employer may require less than a year of service. However, for a plan that provides for immediate vesting, an employer may require two years of service. 401(k) plans may not require more than one year of service with regard to an employee’s contribution to the plan. A plan that provides for an employer matching contribution or profit sharing may require two years of service for participation in those parts of a 401(k) plan. Part-time or seasonal employees may not be excluded from a plan on the basis of those classifications, although they may be excluded if they have not met the service requirement. A plan may impose an age requirement, but the age requirement cannot exceed age 21. There can be no maximum age for participation in a plan.
Becoming vested in a plan refers to the point at which a participant’s rights in some portion of the plan can not be forfeited, even if the participant leaves the company prior to retirement. A plan participant is always fully vested in whatever contributions he or she makes to the plan; the time for vesting in employer contributions, if any, may vary. Plans may designate different times of vesting, whether a fixed period of service, or a gradual, increased percentage of vesting over several years. For example, one plan may provide for no vesting until five years, at which time the participant becomes fully vested. Another plan may provide that a participant is 20 percent vested after three years, increasing by 20 percent until the participant is fully vested as of seven years of service. ERISA allows plans to choose their vesting schemes; however, a vesting scheme must be as least as generous as the examples given.
Under ERISA, if a plan participant experiences a break in service for an employer, under some circumstances the participant may forfeit some of his or her service credit. There are detailed rules for how much of a break in service may precipitate a forfeiture of service and to what extent service credit may be lost. Similarly, if a plan participant leaves their employment while under an unvested or partially vested plan, the participant will forfeit their right to the amount of the employer contribution that is not yet vested. For example, if an employee under a plan that does not vest at all until five years of service left the service of the employer after four and one-half years, the employee would retain ownership of the funds he or she paid into the plan but would lose the right to all of the employer’s contributions.
Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.