Common Issues Arising upon Separation from Employment
II. Employee Rights to Retirement or Pension Monies
Your right to retirement and pension monies after separation from employment is controlled primarily by the plan documents and by federal law.
In general, there are two types of plans:
A) A traditional pension plan is called a defined benefit plan because the benefit you receive at retirement is defined by the plan formula. For example, age, years of severance and the average of the five highest years of compensation. These plans are most often employer funded, however, you may have had the opportunity to voluntarily contribute to the plan.
B) 401k plans have been a popular way to defer income for retirement purposes. These are known as defined contribution plans because the plan defines the contribution the employee can make and what, if any, contributions the employer will make to the employee's account.
Vesting in any type of retirement plan refers to the percentage of your ownership of the monies contributed to the plan on your behalf by your employer. In graduated vesting, your percent of ownership gradually increases, according to the plan, until you are 100% vested, always by the seventh year.
If you separate before the seventh year, you are vested for the percentage earned according to the plan. Cliff vesting means you are 100% vested on a particular date - normally five years from entering the program. You are always 100% vested for your personal contributions to these plans. Employer contributions may be vested according to either the graduated or cliff vesting discussed previously.
It is worthwhile to discuss your options concerning these plans with your Human Resource representative. The vesting and payment of these monies to you is governed by the plan documents and a body of federal law known as ERISA. Be sure you understand all the options available to you.
Any payment of retirement monies to you can have significant tax consequences. Again, ask your Human Resource representative for information and discuss this matter with your accountant to ensure you have a thorough understanding of your options.