The major worry for an individual after he/she retires
from work is about having a continued source of income.
Employers are not required to offer
pension benefits,
and it depends on their discretion. However, upon
retirement many workers receive a monetary benefit
from their employers in the form of a pension. There
are basically two types of pension plans. And no plan
should
discriminate against members of a protected
class.
Defined benefit plan -
In this plan, the amount received is normally based
on the duration of the employment and the wages received.
The employer commits to paying a certain benefit amount
when the employee retires. Each employee does not
have a separate account in these programs, as the
money to support the pensions is generally administered
through a trust established by the employer.
Defined contribution plan
- The employer must contribute regular deposits into
an account established for each employee. The amount
should be same for both females and males. The employee
is not guaranteed to receive a given amount during
retirement, but only the amount in the account.
It is tied to profit, and as profits rise or fall,
the investment in the retirement fund will change.
The defined contribution plans include-
401 (K) Plans –
This is an arrangement that permits an employee to
elect to have the employer contribute part of the
employee's wages into a retirement plan on a pre-tax
basis. It gives employees the choice of deferring
payment of part of their wages until retirement. The
deferred amount, which some employers contribute at
least in part, is then invested for retirement. The
benefit due to the employee upon retirement depends
on the amount of money in the account and the payout
method selected.
Profit Sharing plans
– In this plan, a designated percentage of the
company profits are added to employee contributions;
this amount goes into a trust fund. This will finance
retirement benefits.
Stock-Option plans
– It either gives employees stock options in
the company or gives them an opportunity to buy shares.
It depends upon the employees’ incomes as to
how many shares they are allowed to purchase.
Individual Retirement Accounts
(IRAs) -This lets the employee contribute a
maximum amount to a tax deferred account: $2,000 for
individuals, or $2,250 if the employee has a spouse
who does not work. In some cases, it can also be sponsored
by the employer.
However, employers are not required to provide a
pension to all their workers. They can exclude 30%
of the workforce, and they can exclude certain types
of employees. But they cannot just cover higher-ups
and discriminate against lower-paid workers. Generally,
employees are required to reach a certain age, such
as 62 or 65, before they can avail themselves of any
pension plan in its totality. But many plans support
early retirement, at the age of 55 or above, and the
employee may receive pension benefits, but at a reduced
monthly rate.
ERISA
ERISA is a federal law that sets minimum standards
for pension plans in the private sector. It covers
most pension plans operated by private sector employers.
However, it does not cover government workers or the
military. The law specifies when the employee must
be allowed to become a participant, how long they
have to work before they have a non-forfeitable interest
in a pension, how long a participant can be away from
the job before it might affect benefits, and whether
the spouse has a right to be part of the pension in
the event of the employee’s death.
ERISA requires that most employees be allowed to
participate in an employer-sponsored pension plan,
if they are at least 21 years of age and have completed
one year of service with the company.
