Employee Retirement Income Security Act of 1974 (ERISA)

Retirement plans always begin with one or more pages of definitions of terms used throught the entire contract. And, at least when I was in the business, “he” or “his” was always used as a matter of practicality instead of having to enter “he or she” and “his or her” throughout the document. I’ve done the same thing throughout this site to save keystrokes. In no way does it reflect my personal ideals or thoughts because I am, and always will be, a progressive liberal and a feminist.

Employee Retirement Income Security Act of 1974 (ERISA)

The Employee Retirement Income Security Act of 1974 (ERISA) was a major act that set minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.

Prior to the establishment of this Act, many employers would abuse the system by setting a vesting schedule that declared the plan participants not vested in their retirement benefits until they reached age 65. Then they would fire these participants at age 64, leaving them with no vested interest in their retirement benefit. And all the money contributed to the plan to fund these benefits would revert back to the employer.

This and other abuses were corrected by ERISA. Minimum vesting schedules were established by this law. Retirement plan contributions were no longer allowed to revert back to the employer.  Limits were established so that a plan could no longer be written to discriminate against the rank and file provide a disproportionate portion of the benefits to senior executives.

Definitions

For this purpose, I’m going to show just the definitions that are germane to this discussion.

  • Participant – any employee who has satisfied the eligibility requirements to enter the plan.  This is usually worded to the effect of “the first of the year following the year in which the employee has worked 1,000 hours”.
  • For Example:  If the plan runs on a calendar basis, and if you start a job on or before July 1, and work 40 hours a week for the remainder of the year, you will have worked 1,000 or more hours and therefore be eligible to participate in the plan on the following January 1.
  • Credited Year of Service – any employee who works at least 1,000 hours during the plan year or calendar year.  Plan provisions usually state which period of time is used if the fiscal year of the plan is not a calendar year.
  • Normal Retirement Age – this is usually defined as age 65.  There are other variations a few plans will use.
  • Early Retirement Age – this is usually defined as age 55 and with ten years of service or participation in the plan.  This is really only relevant to defined benefit plans; you’ll see why later.

Graded Vesting

  • Upon Completion of one year of Credited Service –      0%
  • Upon Completion of two years of Credited Service –    20%
  • Upon Completion of three years of Credited Service – 40%
  • Upon Completion or four years of Credited Service –   60%
  • Upon completion of five years of Credited Service –    80%
  • Upon completion of six years of Credited Service –     100%

Cliff Vesting

  • Upon Completion of one year of Credited Service –      0%
  • Upon Completion of two years of Credited Service –     0%
  • Upon completion of three years of Credited Service –  100%

If you die while still a participant, your benefits automatically become 100% vested.

Any money you contribute to the plan, whether pre-tax or after-tax is always 100% vested.

Conclusion

Since the enactment of ERISA, there have been many changes and improvements.  For example, the minimum vesting schedules initially were graded over 15 years and under the cliff vesting schedule, you were 0% vested until you worked ten years, instead of three years.  In addition, there were no 401(k) plans back in 1974.

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