Chapter 22 Employee Benefits

1. Employment Law: New Challenges in the Business Environment Chapter 22 Employee Benefits

2. Define ERISA. Understand why ERISA was enacted. Learn what motivates employers to underfund their companies’ pension plans. Know what a defined benefit plan is. Be aware that a defined benefit pension is fixed. Be cognizant of what a defined contribution plan is. Appreciate the concept of vesting. Recognize the concept of graduated vesting. Realize the significance of pension income to retirees. Be apprised of the age fro eligibility to participate in pension plans. Chapter Checklist

3. Employee Benefits The Employee Retirement Income Security Act of 1974 (ERISA) divides employee benefit plans into pension plans and welfare plans. Pension plans provide income for retirement. Welfare plans include, but are not limited to, medical and insurance benefits.

4. Defined Benefit Plan Originally, pension plans provided a defined benefit based on the employee’s salary and the number of years of service. The determination of the “employee’s salary” may be based on average over more than 1 year. The amount determined to be paid will be fixed for the remainder of the retiree’s life. This amount, which may be generous on the date of retirement, may become seriously eroded after many years.

5. Defined Contribution Plan This plan is more popular. The income generated at retirement is not guaranteed as in the defined benefit plan. Rather it depends on the contributions made by the employee. The employer may also contribute and the amount may be conditioned on the on the employee’s contribution or independent. Profit sharing plans provide for employer contributions based on a formula or at the discretion of the employer.

6. Eligibility An employee must be 21 years of age and have worked 1 year with the employer before becoming eligible to participate in that employer’s pension plan.

7. Vesting Vesting occurs when the employee acquires the right to the contribution made on his or her behalf by the employer. An employee may be partially or fully vested. An employee becomes partially vested if, beginning in the third year, the plan provides for 20% vesting for each of the next 5 years. Vesting applies only to the employer’s contribution.

8. Inflation In a defined benefit pension, the amount per year is fixed. What may seem to be a generous amount initially will erode over time because of inflation.

9. Human Resource Advice Understand the ramifications of ERISA. Keep your pension plan fully funded. Learn what constitutes a defined benefit plan. Know how to construct a defined contribution plan. Realize that a defined contribution plan invited employees to allocate income to the plan.

10. Human Resource Advice (Cont.) Recognize that a defined contribution plan may guard against inflation. Be cognizant that defined benefit plans are fully funded by employers. Be aware that an employer can determine the amount, if any, that it wants to allocate to a defined contribution plan. Determine when an employee becomes vested. Be apprised that the age for pension eligibility is 21.

11. Summary ERISA was enacted to protect employees from forfeiting their pensions if they were dismissed prior to 65 years of age. Employers have shifted the funding of pensions from themselves to their employees Minimum funding requirements were instituted to guarantee that pensions are adequately funded. Fiduciaries must be responsible in selecting investments and in allocating pension funds among those investments they selected.