Government rules for private pension plans are established under the federal Employee Retirement Income Security Act. ERISA sets the retirement age, or the age at which you can begin to receive benefits, in qualified pension plans, or those that can provide tax benefits to employers and participating employees. ERISA does not govern the retirement age for nonqualified private plans.
Normal Retirement Age
A private pension plan may set its own age at which you can receive full benefits. A qualified plan, however, can't set rules more restrictive than those in ERISA. Under the act, if you've left the company after at least 10 years of service, the company must let you begin tapping into these benefits by no later than age 65. If you are already 65 but haven't served at least 10 years, the company can require you to wait until you achieve the 10 years, but no later than age 70.
Pension Plan Types
Private pension plans typically are one of two types: defined benefit or defined contribution. A defined benefit plan is funded solely by your employer and pays you a defined amount each month during retirement, typically calculated based on age, years of service and salary. You and your employer both ante up in a defined contribution plan such as a 401(k). You choose where to stash your nest egg, and your benefits in retirement depend on investment performance.
Different Vesting Schedules
"Vesting" determines how much of the money in your pension account you'll be able to keep if you leave the company. Although employers can determine vesting, they must be at least as generous as ERISA rules. Under the act, defined benefit plans can have one of two vesting schedules: five-year "cliff" or seven-year, graded.
In "five year cliff," you receive no benefits if you leave your company with less than five years of service but you have a right to all your benefits if you stay five years or more. A seven-year, graded schedule allows for incremental vesting beginning in year three and continuing until you're entitled to 100 percent of your benefits after seven years of service.
In defined contribution plans, you have a right to your own savings and investment gains at retirement no matter how long you stay with your employer. Employers can choose "cliff" or graded vesting for their contributions. As of 2019, ERISA standards for defined contribution plans include two vesting types: cliff vesting, for which an employee is 0 percent vested during the first two years but 100 percent vested after three years of service; and graded vesting, beginning at 20 percent in year two and increasing incrementally until 100 percent vesting is reached at year six.
Younger Than Normal Retirement Age
ERISA allows employers to opt for a retirement age younger than age 65 for a defined benefit or defined contribution plan. Many allow you to tap your defined benefit pension as young as 55 or take your entire defined contribution plan stash when you leave the company. Starting to receive a defined benefit pension before "normal retirement age" typically reduces your benefits. Discuss plans to take any lump sum from your defined contribution plan with your tax adviser.
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