This chapter outlines your rights to payment of your benefits. The following questions are addressed:
- When will your benefits be paid?
- In what form will your benefits be paid?
As described in the previous chapter, ERISA sets rules protecting your eligibility to participate, your accrual of benefits, and your becoming vested under your retirement plan. ERISA also provides a variety of rules concerning when, as a plan participant, you may or must be permitted to receive your benefits. This chapter describes the payment of your benefits.
When can you expect payment of your benefits?
ERISA provides specific rules governing when you may, or must, begin receiving your retirement benefits. First, ERISA sets the latest date by which the plan must permit you to begin receiving your benefit. Under this rule, payment must begin by the 60th day after the end of the plan year in which the latest of the following events occur:
- you reach age 65 or, if earlier, the normal retirement age specified by your plan;
- the end of the 10th year after you began participation in the plan ends; or
- you terminate your service with the employer.
Thus, for example, your plan must provide at a minimum that you will be entitled to begin to receive your benefit 60 days after the end of the year in which you reach age 65, if you began participation in the plan at least 10 years before that year.
Your plan may allow you to receive payment of your benefit earlier than required by the above rule (and many plans do, subject to rules described below). However, as long as the present value of your vested accrued benefit is greater than $5,000, the plan cannot force you to begin receiving your benefit before you reach the age that is generally considered normal retirement age (or age 62 if later).
If the present value of your vested accrued benefit under the plan is $5,000 or less, the plan may require you to receive your benefit when it first becomes distributable, such as when you terminate employment. In determining whether your vested accrued benefit is $5,000 or less, the portion of your benefit that comes from amounts rolled over from another plan is not counted.
When may your plan permit you to take payment?
ERISA provides rules governing the times at which a retirement plan may permit you to receive benefits. As these limitations on “distribution events” for payment vary depending on the type of plan, consult your summary plan description or plan document for the specific events or times that are the conditions under which you will be entitled to receive your benefits. After the event occurs that permits payment of your benefit, your plan may require some reasonable period of time during which to calculate your benefit and determine your payment schedule, or to value your account balance and to liquidate any investments in which your account is invested. The following are a few general rules about possible distribution events for which your plan may provide:
If your plan is a defined benefit plan or a money purchase plan, it will set a normal retirement age, which is generally the time at which you will be eligible to begin receiving your vested accrued benefit. These types of plans may permit earlier payments, however, either by providing for “early retirement” benefits, for which the plan may set additional eligibility requirements, or by permitting benefits to be paid when you terminate employment, suffer a disability, or die.
If your plan is a 401(k) plan, it may permit you to take some or all of your vested accrued benefit when you terminate employment, retire, die, become disabled, reach age 59½, or if you suffer a hardship. If your plan is profit-sharing plan or a stock bonus plan, your plan may permit you to receive your vested accrued benefit after you terminate employment, become disabled, die, reach a specific age, or after a specific number of years have elapsed.
Your plan’s summary plan description should describe all of the rules applicable to any of the events that permit distributions.
When must you take payment?
ERISA also sets a date by which you must begin to receive your benefits, regardless of your wishes or the plan’s rules, if your plan is tax-qualified. This mandatory beginning date is generally April 1 of the calendar year following the calendar year in which you reach age 70½ or retire*. ERISA provides rules for determining how much of your accrued benefit you must then receive each year.
In what form will your benefits be paid?
With some very important limits, your plan can dictate the forms in which you may receive your accrued benefit. The protections that ERISA provides about form of benefit payments vary (again) depending on whether you have a defined benefit plan, money purchase plan, or other kind of defined contribution plan. If you are covered under a defined benefit plan or a money purchase plan, your benefit must be available in the form of a life annuity, which means you will receive equal periodic payments (e.g., monthly, quarterly, etc.) for the rest of your life. If you are married, your benefit must be available in the form of a “qualified joint and survivor annuity.” (That form of benefit payment is described in the next chapter, concerning spousal rights to benefit payments).
If you are covered under a defined contribution plan that is not a money purchase plan, the plan may choose to pay your benefits in a single lump sum payment, or in any other form it chooses. If it offers a life annuity option, however, and you choose that option, you and your spouse (if any) will be protected by being offered a life annuity or a joint and survivor annuity that satisfies the requirements of ERISA.
Providing Survivor Benefits To Your Spouse
This chapter tells you what protections ERISA provides to your surviving spouse if your benefit was vested upon your death. The following questions are addressed:
- Which retirement plans are required to offer survivor annuities?
- What is a qualified joint and survivor annuity?
- What is a qualified preretirement survivor annuity?
- What rights does a spouse have under your retirement plan?
- Does your spouse have to agree to the form of benefit payment you elect?
- May you leave your survivor benefit to a beneficiary other than your spouse?
What happens to your benefits upon death?
ERISA provides some protection to surviving spouses of deceased participants who had a vested retirement benefit before death. The nature of the protection depends on the type of plan and whether the participant dies before or after payment of the benefit is scheduled to begin, otherwise known as the annuity starting date. The summary plan description, described in Chapter 2, will tell you the type of plan involved and whether survivor annuities or other death benefits are provided under the plan.
What is a qualified joint and survivor annuity (QJSA)?
In a defined benefit plan or a money purchase plan, the form of retirement benefit payment, unless you and your spouse (if any) chose otherwise, must be a series of equal, periodic payments over your lifetime, with a payment continuing to your spouse for the rest of his or her life if he or she survives you. The periodic payment to your surviving spouse must be at least 50 percent, and not more than 100 percent, of the periodic payment received during your joint lives. This form of payment is called a “qualified joint and survivor annuity” (QJSA).
If the plan provides other forms of benefit payment, and you and your spouse want to waive your rights to receive the QJSA and select one of the other payment forms available, you can do so according to specific rules. You and your spouse must receive a timely explanation of the QJSA, your waiver must be made in writing within certain time limits, and your spouse must give consent to the waiver in writing witnessed by a notary or plan representative.
What is a qualified preretirement survivor annuity (QPSA)?
A survivor annuity must also be offered by a defined benefit or money purchase plan if a married participant with a vested benefit dies before he or she begins receiving benefits. This survivor annuity is called a “qualified preretirement survivor annuity” (QPSA). ERISA specifies how the QPSA is calculated. You and your spouse must be given a timely explanation of the QPSA. You may only waive the right to a QPSA in writing, and your spouse must consent to the waiver of the QPSA in writing, witnessed by a notary or plan representative.
What survivor benefit rules apply to most defined contribution plans (such as 401(k) plans)?
Most profit-sharing and stock bonus plans, like 401(k) plans, generally need not offer a survivor annuity. However, there are rules for such plans that protect the spouse as beneficiary.
Before you begin to receive your benefits under such a plan, your spouse is automatically presumed to be your beneficiary. Thus, if you die before you receive your benefits, all of your benefits will automatically go to your surviving spouse. If you wish to select a beneficiary other than your spouse, your spouse must consent in writing, witnessed by a notary or plan representative. This protects your spouse in the event of your death before any payout has been made. When you reach a distribution date, however, such as when you terminate employment or reach retirement, you may choose, without your spouse’s consent, among any optional forms of payment offered by the plan, including a life annuity, if offered by the plan. If you choose a life annuity, however, your spouse is then protected by QJSA rules, and the benefit will be paid as a QJSA unless you and your spouse consent to a different form, as outlined above.
Where can you get more information about QJSA and QPSA rights?
ERISA and the Internal Revenue Code prescribe detailed rules regarding the QJSA and QPSA rights. You may wish to obtain from the Internal Revenue Service the following publications on survivor annuities:
- IRS Publication 1565 — Looking Out for #2: A Married Couple’s Guide to Understanding Your Benefit Choices at Retirement from a Defined Contribution Plan;
- IRS Publication 1566 — Looking Out for #2: A Married Couple’s Guide to Understanding Your Benefit Choices at Retirement from a Defined Benefit Plan.
These rules reflect the law in effect for participants who completed an hour of service (or paid leave) on or after August 23, 1984. ERISA’s survivor annuity rules are different if you are the surviving spouse of a participant who left employment before that date. |
