Country Profiles

United States of America

Country Profiles

United States of America

Complementary pensions (Voluntary)

Updated: 31 December 2017
2014: Multiemployer Pension Reform Act (MPRA); amends ERISA, increases premiums for multiemployer plans and allows certain failing multiemployer defined benefit plans to cut accrued benefits, if doing so would restore long-term solvency while keeping benefit levels at least 10% above PBGC guarantee levels.

2006: Pension Protection Act (PPA); amends ERISA, requires more rapid funding of under-funded defined benefit plans, establishes new designations and requirements for failing multiemployer defined benefit plans, facilitates automatic enrolment and investment advice in 401(k) plans and clarifies the legal status of cash balance plans.

2001: Economic Growth and Tax Relief Reconciliation Act (EGTRRA); amends ERISA, increases contribution and benefit limits, improves transferability between different types of defined contribution plans and regulates faster vesting for employer matching contributions to 401(k) plans.

1994: Uruguay Round Agreements Act; amends ERISA, requires greater contributions to under-funded defined benefit plans and limits the range of interest rate and mortality assumptions used to establish funding levels.

1986: Tax Reform Act; amends ERISA, establishes faster minimum vesting rules, limits the effect of integration with the social security scheme, expands coverage of non-highly compensated employees and imposes an excise tax on excess plan assets that revert to an employer upon winding up of a pension plan.

1984: Retirement Equity Act; amends ERISA, requires that when a plan provides pensions at retirement, survivorship pensions must be provided unless the spouse waives the right in writing to survivorship pension.

1978: Revenue Act; establishes 401(k) plans (enabling regulations released in 1981).

1974: Employee Retirement Income Security Act (ERISA); most important complementary occupational pension plan law in the United States. Provides for protection of rights through regulation of participation, vesting, funding, fiduciary standards and reporting, and through the establishment of the Pension Benefit Guaranty Corporation (PBGC), which pays benefits in the case of financial failure of defined benefit plans.

1947: Labor-Management Relations Act (also known as Taft-Hartley Act); provides guidelines for the operation of pension plans administered jointly by employer and employee trustees.

1942: Revenue Act; establishes for the first time the principle that benefits are to be provided to non-highly compensated employees on a non-discriminatory basis.

1928: Revenue Act; allows employers to claim tax deductions for reasonable amounts contributed to pension plans.

1921: Revenue Act; exempts pension trust investment earnings from current taxation.

Plan sponsors

Employers, singly or as a group, may on a voluntary basis establish a complementary occupational pension plan for their employees. The plan sponsor decides what type of plan to establish.

For a group of unionized employees, the employer must negotiate with the union concerning any occupational pension plan which becomes part of the work contract. Multiemployer plans result from collective bargaining between organizations representing several employers and unions.

Individual employees, the self-employed and non-employed spouses may establish Individual Retirement Arrangements (IRAs) through a contract with an IRA provider. IRAs have tax advantages for the IRA holder. Some employer-sponsored plans may be implemented through IRAs (see section Types of plans).

 

Types of plans

There are two basic types of plans, defined benefit and defined contribution plans, but hybrid plans, particularly cash balance plans that combine defined benefit and defined contribution features, are becoming more common.

All plans:
All plans must meet standards established by the Employee Retirement Income Security Act (ERISA) to receive tax-qualified status (preferential tax treatment). Some of the ERISA standards for tax qualification include minimum coverage, participation and vesting requirements. Plans cannot include a disproportionate number of highly compensated employees over non-highly compensated employees or pay disproportionately greater benefits to the former (non-discrimination rules). Plans must be operated in a sound fiduciary manner and be adequately funded.

Defined benefit plans: Defined benefit plans are based on formulae that often include years of service and a percentage of salary. The sponsoring employer bears the risk to ensure that the benefits are available at retirement in single-employer plans; the Board of Trustees fills a similar role for multiemployer plans (collectively bargained plans which cover multiple employers).

If an employer offers a plan, participation is automatic and thus compulsory for covered employees. Employers are not required to cover all employees but they must meet minimum employee coverage and non-discrimination rules. Separate funding requirements and PBGC guarantees apply to multiemployer and single-employer plans.

Defined contribution plans: Defined contribution plans provide individual accounts for members. The benefits are based on employer and employee contributions along with income, gains, losses and forfeitures (from other employees' accounts). The plan member bears the risk under this type of plan.

Participation may be automatic or voluntary for covered employees depending on the type of defined contribution plan and/or plan rules. Employers are not required to cover all employees, but they must meet minimum employee coverage and non-discrimination rules.

There are many types of defined contribution plans and the most important ones are:

- Profit-sharing plan: plan established and maintained by an employer to provide for the participation by employees in the sponsoring employer's profits. While this is the traditional definition, the contributions may now be based on salary. The method for determining contributions must be defined in the plan;

- Employee stock ownership plan (ESOP)
: plan that provides shares of stock in the sponsoring employer to plan members. An ESOP invests at least 51 per cent of its assets in the sponsoring employer's stock and is permitted to borrow money on a tax-deductible basis to purchase this stock;

- Stock bonus plan: plan under which contributions are made in the form of company stock derived from a portion of the company's profits. Benefits are also paid in the form of company stock.

401(k) plans: Defined contribution plans developed specifically under section 401(k) of the Internal Revenue Code, under which employees are allowed to make before-tax contributions from their salaries (see section Tax treatment, Taxation of employee contributions). This feature may be incorporated into most types of defined contribution plans. 401(k) plans have grown so that they cover far more active participants than any other type of defined contribution plan and more than defined benefit plans.

Individual Retirement Arrangements: Tax-favored defined contribution arrangements, which may be established by individuals in the form of either an individual retirement account or an individual retirement annuity. There are several types of Individual Retirement Arrangements (IRAs), including traditional, Roth, SIMPLE and SEP-IRAs. The latter two types are employer-sponsored plans that are implemented through IRAs:

- Savings Incentive Match Plan for Employees (SIMPLE): an employer with fewer than 100 employees may establish a SIMPLE through a contract with an IRA provider to which employees earning at least USD 5,000 can contribute a portion of their before-tax salaries. The maximum employee contribution is USD 12,500 in 2017 (USD 15,500 for employees age 50 or older). Employers either match the employee contribution by as much as 3 per cent of salary or make a straight contribution of as much as 2 per cent of salary. Both employee and employer contributions vest immediately.

- Simplified Employee Pension (SEP): plan for small employers in which they establish SEP-IRAs through a contract with an IRA provider for themselves and their employees. The maximum contribution limits are 25 per cent of salary or USD 54,000 for 2017, whichever is less, and contributions vest immediately. These limits are subject to future cost-of-living adjustments as the years go by.

IRAs, including SIMPLE and SEP-IRAs, are not covered further in the following sections.

All plans: Plans must be implemented under a written trust agreement or through an insurance contract.

Under a trust agreement, the management of the plan is the responsibility of the trustees who are fiduciaries and must discharge their duties solely in the interest of plan members and beneficiaries. Trustees can be either companies or individuals. There are no significant legal requirements concerning who may or may not be a trustee. However, the duty of care or responsibility that a trustee must exercise on behalf of plan members and beneficiaries is clearly defined.

The trustees may manage the contribution and benefit administration or contract it out to a pension management or insurance company. Pension management companies are subject to the fiduciary rules of the Employee Retirement Income Security Act (ERISA) pension legislation.

Under an insurance contract, the insurance company manages the contribution and benefit administration. The establishment and operations of insurance companies are subject to the law of the state where the insurance company is located.

Expand
All plans: Private-sector employees.

Sponsoring employers have some flexibility in determining who will be covered under a plan and can create different plans for different groups. In order to receive tax-qualified status, however, a plan must satisfy legal requirements concerning non-discrimination in contributions and benefits. Coverage and participation must not discriminate in favour of highly compensated employees. Age discrimination against older employees is prohibited.

Plans for public sector employees are not subject to the vesting and participation restrictions of ERISA but to the Internal Revenue Code restrictions on contributions and benefits. They are also subject to the state and local laws regulating the particular governmental unit. Plans for federal government employees are governed by federal law.

Individual employees, the self-employed and non-employed spouses may establish Individual Retirement Arrangements (IRAs) through a contract with an IRA provider.

Self-employed persons have some plan choices in addition to IRAs that provide for higher contribution limits (e.g. Keogh plans).

Information on public sector plans and IRAs is not provided further in the following sections.

Sources of funds

Employee contributions

All plans except 401(k) plans: Plans are usually non-contributory because employee contributions are not tax-deductible.

401(k) plans: Often employee contributions are required for plan membership. Employee contributions must be deposited in the employee's account as soon as feasible, but no later than the 15th day of the month following withholding.

Employer contributions

All plans: There are maximum limits on employer contributions (see section Tax treatment, Taxation of employer contributions).

All plans except 401(k) plans: Employers are required to contribute.

401(k) plans: Employer contributions may depend on the employee contribution, in which case they are called employer matching contributions. The proportion of the employee contribution matched by the employer depends on plan rules.

Other sources of funds

All plans: None.

Methods of financing

All plans: Funded.

Asset management

All plans: In the case of plans implemented through a trust, the plan sponsor may manage the assets or delegate the asset management to one or several asset managers. In that case, the trustee may be one of the asset managers. Contracted asset managers must be an investment adviser registered under the Investment Advisers Act of 1940, a bank, or an insurance company qualified under the laws of two or more states to provide asset management services.

The plan sponsor or, when delegated to do so by the plan sponsor, the trustees decide on the general investment policy.

Assets must be invested with the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others (prudent person rule). In the case of defined benefit plans and certain defined contribution plans a maximum of 10 per cent of total assets may be invested in the sponsoring employer.

There is a general prohibition against business and investment transactions between the plan and parties with which there might be a conflict of interest.

In the case of plans implemented through insurance contracts, the insurance company manages the assets. The investment is subject to the law of the state where the insurance company is located.

Acquisition and maintenance of rights

Waiting period

All plans: Employers may define service and age requirements for participation in a plan.

The waiting period for workers aged 21 or more cannot be more than one year of service, except if the plan provides immediate full vesting. In that case a waiting period of up to two years may be applied.

The minimum age cannot be more than 21 and there must not be a maximum age for membership.

Vesting rules

Defined Benefit Plans: With the exception of cash balance plans, either of the following methods for the vesting of employer contributions may be applied:

- full vesting after five years of service; or

- gradual vesting beginning at 20 per cent of contributions after three years of service and rising gradually to 100 per cent after seven years.

Cash balance DB plans must provide for full vesting after three years of service.

Defined Contribution plans: Two methods for the vesting of employer matching contributions may be applied:

- full vesting after three years of service; or

- gradual vesting beginning at 20 per cent of contributions after two years of service and rising gradually to 100 per cent after six years.

All plans: Employee contributions vest immediately.

More rapid vesting of employer contributions may be required if the plan is considered by the Internal Revenue Service to have a disproportionately high percentage of benefits or contributions going to certain highly compensated employees.

Full vesting must occur when a member reaches the plan's normal retirement age, which is usually age 65 for defined benefit plans, or if the plan is voluntarily wound up.

Preservation, portability, transferability

All plans: Upon termination of employment before retirement, plan members may, if the plan provides for this option, withdraw the cash value of their accrued benefits or their accumulated own and vested employer contributions as a lump sum. Defined contribution plans almost always provide for this option whereas many defined benefit plans do not. An excise tax of 10 per cent generally applies to such lump sum withdrawals before age 59 and six months in addition to income tax unless the lump sum is rolled-over into an Individual Retirement Account (IRA) or another qualified retirement plan.

In the case of defined contribution plans, employees cannot continue contributing to a plan after terminating employment with the sponsoring employer.

It is generally possible for plan members to transfer the accumulated capital to another defined contribution plan, if they have access to such a plan and the plan accepts such transfers. EGTRRA (see section Regulatory framework) increased transferability by expanding the types of plans that can take transfers and making it easier to transfer rights from one type of plan to another (e.g. between public sector and private sector plans). In addition, the law provides for easier transfer of benefits that a surviving spouse receives as a beneficiary to plans in which spouse participates.

Retirement benefits

Benefit qualifying conditions

Defined contribution plans: Benefits generally can be received when the participant terminates employment with the employer sponsoring the plan.

Defined benefit plans:
The normal retirement age is defined in the plan rules (usually full benefits at age 65). Often reduced benefits are available at age 55.

Deferred retirement is allowed, as employers cannot require employees to retire solely on account of reaching a certain age.

Benefit structure / formula

All plans: Plans may be integrated with the social security scheme. Integration may be by taking social insurance benefits into account in the calculation of either benefits or contributions.

Defined benefit plans: No legal rules, except a tax limit on the accrual of benefits (see section Tax treatment, Taxation of employer contributions).

A great variety of defined benefit plans with different benefit formulas exist. Benefits may be earnings-related or flat-rate. Formulae may be based on factors such as average career salary or final salary. Cash balance plans are hybrid plans that are categorized in pension law as defined benefit plans under which the employer credits notional contributions to hypothetical individual accounts and periodically adds interest at a pre-defined rate. These plans have developed as an alternative to traditional plans.

It is prohibited for benefits to accrue too disproportionately at the end of a member's career. Accrual must not be reduced or discontinued because of age, but the employer is allowed to restrict the number of years of benefit accrual if the member works beyond the plan's normal retirement age.

Plans must permit benefits to be paid as pensions, but some offer a lump-sum benefit option. Benefits default to payment as pensions, with spousal continuation for married individuals.

Defined contribution plans: Subject to certain limitations, the amount of benefit entitlement depends on the amount of employer and employee contributions adjusted for investment gains and losses. At least once a year, but typically more frequently, the investment gains and losses are allocated to the individual accounts. The accumulated capital at retirement is generally paid as a lump sum.

The plan sponsor determines in the plan rules whether or not pensions are provided.

Benefit adjustment

All plans: No legal rules.

Plan sponsors may increase pensions in payment on a discretionary basis.

Survivors

All plans: A spouse pension must be paid as the default where the plan rules provide for an old-age pension annuity (see section Retirement benefits, Benefit structure/formula) to be payable to the retiree unless the spouse waives the right to the survivorship pension at the member's retirement. The waiver must be in writing and witnessed by a notary public or plan representative.

If a plan member dies before drawing benefits, the plan must pay a pension to the surviving spouse, beginning when the member would have reached the plan's early retirement age or upon the member's death, whichever is later.

The benefit must equal at least 50 per cent of the deceased member's old-age pension. Upon death before retirement, the benefit must equal at least 50 per cent of the accrued pension at the time of death in the case of defined benefit plans.

Defined contribution plans which only provide lump sums at retirement (nearly all defined contribution plans) are not subject to survivorship benefit rules. In this case the deceased member's accumulated capital is paid to the spouse as a lump sum.

Disability

All plans: Separate disability arrangements may be provided with a distinction between short-term disability (usually up to six months, but sometimes extending up to a year) and long-term disability.

Protection of Assets

All plans: Plan assets must be held separately from the assets of the sponsoring employer.

Financial and Technical Requirements / Reporting

All plans: Annual reports for the plan containing a financial statement must be filed with the Internal Revenue Service and the Labor Department for regulatory oversight.

The annual financial statements for large plans (100 or more participants) must generally be audited.

Defined benefit plans: Funding of defined benefit plans is regulated to limit under-funding, which would pose a potential liability to participants and the Pension Benefit Guaranty Corporation (PBGC) (see section Protection of rights, Bankruptcy: insolvency insurance/compensation fund). Over-funding is regulated to prevent loss of tax revenue to the federal government through the tax-deductibility of employer contributions.

Funding regulations require minimum contributions when plans are under-funded and prohibit contributions when they are over-funded by a certain amount. Funding requirements for single-employer plans are enforced by an excise tax on missed contributions (effectively eliminated for multiemployer plans under PPA).

Defined benefit plans must be evaluated annually by an actuary.

Whistleblowing

All plans: There are no legal requirements for service providers of a pension plan to inform the supervisory authority if they believe that the plan is not being managed in compliance with legal requirements.

Standards for service providers

All plans: Auditors must meet minimum legal requirements to provide services to pension plans and must be professionally certified.

Actuaries must meet minimum legal requirements to provide services to pension plans and pass certain examinations.

Fees

All plans: Fees must be reasonable.

Fees in defined benefit plans are paid by the employer or the trust fund but in defined contribution plans the investment management fees are generally charged to employee accounts.

There are general fiduciary limitations that the plan fiduciaries must act solely in the interests of plan members in negotiating fees.

Winding up / Merger and acquisition

All plans: A single-employer plan may wind up at the discretion of the sponsoring employer, if the plan is not based on collective bargaining, and if it is a defined contribution plan or a fully funded defined benefit plan. If the plan is based on collective bargaining it cannot be wound up without the consent of the union. If the plan is underfunded it cannot be wound up without the consent of the Pension Benefit Guaranty Corporation (PBGC) (see section Protection of rights, Bankruptcy: insolvency insurance/compensation fund). If the plan is overfunded, the plan sponsor must pay a reversion tax on any excess assets returned to the sponsor.

Bankruptcy: Insolvency Insurance / Compensation Fund

Defined benefit plans: The Pension Benefit Guaranty Corporation (PBGC) pays benefits in the event of the winding-up of a single-employer defined benefit plan if the sponsoring employer is bankrupt or financially unable to continue the plan and it is unable to meet all its benefit obligations. PBGC provides financial assistance to insolvent multiemployer defined benefit plans (i.e., plans that do not have sufficient assets to provide benefits).

Premiums

Pension plans pay PBGC yearly insurance premiums. All plans pay a flat-rate premium based on the number of participants. In addition, underfunded single-employer plans pay a variable-rate premium (VRP) based on the amount of unfunded vested benefits.

For 2017, the flat rate premium is $69 per participant for single-employer plans and $28 per participant for multiemployer plans. For 2017, the VRP is 3.4% of the underfunding amount, capped at $517 per participant. All rates are subject to indexing. Additional increases are slated for single-employer plans for 2018 and 2019.

Maximum Guarantee Limits

The maximum PBGC guarantee limit for single-employer plans is set by law. The limit is a cap on what PBGC guarantees, not on what PBGC pays. In some cases, PBGC pays benefits above the guarantee limit. Whether that happens depends on the retiree's age and how much money was in the plan when it terminated.

The amount of the single-employer guarantee varies depending on the age an individual starts receiving benefits from PBGC. For example, the limit is lower for people who begin getting benefits at a younger age reflecting the fact that they will receive more monthly pension checks over their the expected lifetime. Conversely, the limit is higher for people who start receiving benefits later in life. Additional adjustments apply if an individual chooses a payment form that continues payments to a beneficiary after retiree's death.

The single-employer limits are indexed periodically. The following table shows the 2017 limits for sample ages:

 

  Age
Annual Limit
 70 6560
55
 Single Life Annuity
$ 106,957
$ 64,432
$ 41,881
$ 28,994
 Joint & 50% Survivor Annuity*
$ 96,261
$ 57,989
$ 37,693
 $26,095

* Assumes both spouses are the same age. Different amounts apply if that is not the case.

The limits shown above generally apply for participants whose plan terminates in 2017. However, if a plan terminates in 2017 as a result of a bankruptcy that began in an earlier year, the limits in effect for that earlier year apply.

The PBGC maximum guarantee for participants in multiemployer plans is also based on a formula prescribed by federal law. Unlike the single-employer formula, the multiemployer guarantee is not indexed (i.e., it remains the same from year to year) and does not vary based on the retiree's age or payment form. Rather, it varies based on the retiree's length of service. In addition, the multiemployer guarantee structure has two tiers, providing 100% coverage up to a certain level and 75% coverage up to a second level. For example, for a participant who retires with:

  • 20 years of service, the current annual limit is 100% of the first $2,640 and 75% of the next $7,920 for a total guarantee of $8,580 per year.
  • 35 years of service, the annual limit is 100% of the first $4,620 and 75% of the next $13,860 for a total guarantee of $15,015 per year.

The multiemployer guarantee limit has been in place since 2001. In no event does PBGC provide funds for participants with benefits above the guarantee limit.

Defined contribution plans: Not subject to PBGC rules and benefits are not guaranteed.

Disclosure of information / Individual action

All plans: All plans must be disclosed to members in a written plan document. Plan members must receive a simplified form of the plan document known as a summary plan description and a summary of material modifications when plan features are changed.

There is a generally applicable requirement in defined contribution plans to disclose the dollar amount of fees that plan members pay.

Required disclosures include quarterly benefits statements for participant-directed defined contribution plans, annual statements for other defined contribution plans and statements every three years for defined benefit pension plans.

Annual plan reports (see section Protection of rights, Financial and technical requirements/reporting) must be made publicly available.

Plan members can seek assistance in resolving disputes by contacting the Department of Labor or they can take legal action in the court system.

Other measures

All plans: None.

Taxation of employee contributions

All plans except traditional 401(k) plans: Taxed and subject to social security contributions. This includes employee contributions made to a Roth 401(k) plan.

Traditional 401(k) plans: Exempt from income tax up to a yearly ceiling of USD 18,000 (USD 24,000 for employees age 50 or older) for 2017 but subject to social security contributions.

Taxation of employer contributions

Defined benefit plans: Tax-exempt up to a level that allows an annual pension of USD 215,000 for 2017.

Defined contribution plans: Tax-exempt up to a contribution limit of USD 54,000 a year or 25% of salary if this is lower for 2017.

All plans: Exempt from social security contributions.

Taxation of investment income

All plans: Tax-exempt.

Taxation of benefits

All plans: Taxed as income (except benefits financed through taxable employee contributions).
Internal Revenue Service: administers the Internal Revenue Code (tax code) and has primary responsibility for determining the tax-qualified status (preferential tax treatment) of plans. It has jurisdiction over the eligibility, vesting and funding requirements under the Employee Retirement Income Security Act (ERISA).

The Internal Revenue Service is part of the Department of Treasury.

Internal Revenue Service
1111 Constitution Avenue,
NW Washington, DC 20224
USA
Tel.: (+1) 800 829 1040
Internet: http://www.irs.gov

Employee Benefits Security Administration: formerly the Pension and Welfare Benefits Administration, enforces ERISA's standards concerning reporting, disclosure and fiduciary matters. The Employee Benefits Security Administration is part of the Department of Labor.

U.S. Department of Labor
EBSA Office of Public Affairs
200 Constitution Ave., NW
Room S-1032
Washington, DC 20210 USA
Tel.: (+1) 202 693 4650
Internet: http://www.dol.gov/ebsa

Pension Benefit Guaranty Corporation: administers plan winding-up (termination) rules and an insolvency insurance program for defined benefit plans. The Pension Benefit Guaranty Corporation is a federal government corporation established by ERISA.

Pension Benefit Guaranty Corporation
1200 K Street, NW
Washington, DC 20005 - 4026 USA
Tel.: (+1) 202 326 4000
Internet: http://www.pbgc.gov

Copyright

Short excerpts from the Country Profiles website may be reproduced without authorization for non-profit purposes on condition that the source is indicated. For for-profit purposes, rights of reproduction, or translation, application should be made to the ISSA Secretariat at ISSAISD@ilo.org.