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Pension & ERISA

A Pension is a fund from which a retired person draws a predetermined monthly stream of income during their retirement. Some pension or retirement plans are private, while others are government plans. Private Pension or Retirement Plans in the United States are formed and governed by the Internal Revenue Code, which codified ERISA (Employee Retirement Income Security Act of 1974). 

ERISA is a federal law that sets standards for pension plans in private industry. If an employer established a pension plan, ERISA mandates when an employee must be allowed to become a participant, how long they have to work before they have a non-forfeitable interest in their pension, whether their spouse has a right to part of their pension in the event of their death, as well as other related issues. 

ERISA does not require any employer to establish a pension plan. It merely provides the rules for operating a pension plan for those who establish them. Additionally, ERISA does not establish how much how much money a participant must be paid as a benefit. That is up to the individual plan sponsor. But ERISA does require the employer to establish the benefit or benefit formula and to communicate it to the employees. 

ERISA also governs defined contribution plans. Defined contribution plans are pension plans that have a cash balance and pay a retirement benefit to a participant out of the available cash and assets. The employer’s ongoing liability is reduced compared to a pension plan.