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United States General Accounting Office: 
GAO: 

Answers to key questions about private pension plans: 

GAO-02-745SP: 

September 18, 2002: 

The Honorable Amo Houghton: 
Chairman, Subcommittee on Oversight: 
Committee on Ways and Means: 
United States House of Representatives: 

The Honorable William J. Coyne: 
Ranking Member, Subcommittee on Oversight: 
Committee on Ways and Means: 
United States House of Representatives: 

This document responds to your request to provide information about the 
basic features of the private pension plan system and the federal 
framework that governs how private plans must operate. As you 
requested, this private pensions primer includes questions and answers 
about the types of plans that private employers may sponsor, the 
benefits these plans provide, and the basic requirements that govern how
these plans are administered. The answers are intended to be clear, 
concise, and easy-to-understand. Although the primer summarizes and 
explains some of the fundamental aspects of private pensions, the 
material does not provide a complete technical interpretation regarding 
the many complexities of these plans or all of the rules and 
requirements that govern these plans. 

We are also sending copies of the document to the Chairmen and Ranking 
Members of the House and Senate Appropriation Committees, the House 
Committee on Education and the Workforce, the House Government Reform 
and Oversight Committee, the Senate Finance Committee, the Senate 
Health, Education, Labor, and Pensions Committee, the Senate Government 
Affairs Committee, the Secretary of Labor, the Secretary of the 
Treasury, and the Executive Director of the Pension Benefit Guaranty
Corporation. Copies will be made available to others upon request. 

Sincerely yours, 

Signed by: 

David M. Walker: 
Comptroller General of the United States: 

[End of introductory letter] 

Preface: 

Private pensions serve as a key supplement to Social Security and can 
help workers receive adequate incomes in retirement. Employer-provided 
pensions are an important source of income for many retired persons. 
About thirty percent of all households aged 65 and older receive income 
from private pensions, and such income represents 9 percent of their 
total income. Over 50 million workers actively participated in over 
730,000 private pensions, and such plans in 1998 represented over 4 
trillion dollars in retirement savings. However, since the 1970’s, only 
about half of all private sector workers aged 25 to 64 have 
participated in an employer-sponsored pension. The millions of workers 
who have no individual pension coverage are at particular risk for 
inadequate incomes during their retirement years. 

To encourage employers to establish and maintain pension plans for 
their employees, the federal government provides preferential tax 
treatment under the Internal Revenue Code (IRC) for plans that meet 
certain requirements. [Footnote 1] The purpose of tax preferences for 
employer-sponsored pensions is to encourage savings for workers'
retirement. Pension tax preferences are structured to strike a balance 
between providing incentives for employers to start and maintain 
voluntary, tax-qualified pension plans and ensuring participants 
receive an equitable share of the tax-favored benefits. In fiscal year 
2002, these tax preferences for employer-sponsored (public and private 
sector) pension plans are estimated at about $88 billion and represent 
the largest federal "tax expenditure," exceeding those for home 
mortgages or health benefits. [Footnote 2] 

In addition to certain requirements that private plans must meet to 
receive tax-favored treatment, federal law also stipulates certain 
obligations that plan sponsors must fulfill with respect to plan 
operation, funding and management. These obligations are designed to 
protect private plan participants and beneficiaries from mismanagement
and misuse of assets and to ensure that they are entitled to benefits 
under their plans. The rights and obligations of plan sponsors and 
participants are spelled out in the Employee Retirement Security Act of 
1974 (ERISA). For example, the Employee Retirement Income Security Act 
requires plan fiduciaries, or individuals who exercise discretionary 
control or authority over a plan's management or assets, to follow 
certain standards of conduct with respect to the administration of the 
plan. The primary responsibility of plan fiduciaries is to run the plan 
solely in the interest of participants and for the exclusive purpose of 
providing benefits. 

The financial collapse of the Enron Corporation and other recent 
corporate failures, and their effects on the companies' workers and 
retirees, have prompted policymakers and the public to want to know 
more about private pensions and the benefits these plans provide. The 
private pension plan system is complex because employers offer a 
variety of plans to their employees, and sponsors must ensure that the 
design and operation of their plans satisfies a myriad of laws and 
regulations. 

This publication is intended to provide answers to questions about the 
most basic features and components of the private pension plan system 
in a concise and easy-to-understand format. We provide answers to basic 
questions about the types of plans that employers may sponsor and about 
various rules that govern pension plans. We prepared this publication 
to be a primer for those who need to begin to develop an understanding 
of private pensions as well as a resource for looking up common terms, 
such as "401(k)" plans, or basic questions, such as "what is a defined 
benefit plan?" In general, the information in this publication provides 
a foundation for understanding fundamental aspects of the private 
pension plan system. Although we provide information to summarize and 
explain basic terms and features, we do not provide complete details 
regarding the many technical complexities of private pension plans and 
the rules and requirements that these plans must satisfy. This pension 
primer is not intended to provide a legal interpretation of the labor 
and tax laws that govern private plans or be used as a substitute for 
relevant laws and regulations. 

Information is grouped into five sections of questions and answers. The 
first section discusses the public policy framework for private 
pensions, including general information about the labor and tax laws 
that apply to private plans. The second section defines the different 
types of plans that private employers may sponsor and explains how 
these plans provide benefits to participants. The third section 
describes the role of the Employee Retirement Income Security Act of 
1974 in protecting plan participants. The fourth section discusses 
certain fundamental Internal Revenue Code requirements that govern how 
plans must cover employees and provide benefits to participants. The 
fifth section highlights the role of federal government insurance in
protecting the benefits that participants in certain private defined 
benefit plans are entitled to receive. For readers interested in more 
detailed information on the topics covered in this primer, we also 
include a bibliography of related GAO products. Links are provided to 
agency web pages with information on private plans and/or the rules and 
protections that apply to these plans. For easy reference, we include a 
glossary defining key terms in the back of this primer. Terms that are 
defined in the glossary appear in bold type the first time they are 
used in the text. 

This report was prepared under the direction of Barbara D. Bovbjerg, 
Director Education, Workforce and Income Security Issues, who may be 
reached at (202) 512-7215 if there are any questions. Joseph Applebaum, 
Jeremy Citro, Tamara Cross, Patrick Dibattista, Tim Fairbanks, Kimberly 
Granger, Barbara Hills, Corinna Nicolaou, George Scott, Roger Thomas, 
and Stephanie Wasson made key contributions to this publication. 

[End of preface] 

Table Of Contents: 

Preface: 

I. Private Pensions and Public Policy: 
1. Why do private employers offer pension plans? 
2. Who may sponsor a pension plan?
3. What is a multiemployer plan? 
4. What types of pension plan arrangements can private employers 
sponsor for their employees? 
5. What are the tax advantages of sponsoring a qualified plan? 
6. What is the process by which plan sponsors obtain tax-qualified 
status?
7. What laws govern private pension plans? 
8. Which agencies are responsible for enforcing federal laws and
regulations that govern private pension plans? 

II. Types of Pension Plans Employers May Sponsor: 
1. What is a defined benefit plan? 
2. What is a defined contribution plan? 
3. What types of contributions can be made to defined contribution 
plans? 
4. What is the accrued benefit provided by defined benefit and defined
contribution plans? 
5. How may defined benefit and defined contribution plans pay benefits? 
6. What is pension portability? 
7. How may workers preserve their pension benefits for retirement? 
8. Who operates an employer-sponsored pension plan? 
9. What is a 401(k) pension plan? 
10. What is an Employee Stock Ownership Plan (ESOP)? 
11. What are hybrid pension plans? 
12. What is a pension plan floor-offset arrangement? 
13. What is a cash balance plan? 
14. What pension plans are available to governmental employees? 

III. The Role of ERISA: 
1. What is the Employee Retirement Income Security Act (ERISA) of 1974? 
2. Who is a plan fiduciary? 
3. How do the fiduciary provisions of ERISA protect participants? 
4. What is a trust, and what requirements govern trusts? 
5. Who makes investment decisions regarding qualified pension plan 
assets? 
6. Are plan fiduciaries responsible for investment decisions made by 
plan participants? 
7. What rules govern investment of plan assets in employer stock? 
8. Can employers provide investment education and investment advice to 
plan participants? 
9. What kinds of information are plans required to report to the federal
government? 
10. What kinds of information are employers required to disclose to plan
participants? 
11. What is the difference between a plan freeze and a plan blackout? 

IV. Internal Revenue Code Provisions on Plan Coverage and Benefits: 

1. What are the rules for employee eligibility and participation in
pension plans? 
2. What rules govern employee coverage in pension plans? 
3. What are the nondiscrimination rules that private plans must 
satisfy? 
4. What are the “top heavy” rules and when do they apply to private 
plans? 
5. What does vesting mean? 
6. To what extent can accrued benefits be reduced or eliminated? 
7. What rules govern age discrimination in the provision of pension
benefits? 

V. Government Insurance Protection of Pension Benefits: 
1. Under what circumstances may a private employer terminate a
pension plan? 
2. Are participants’ benefits protected when their plan terminates? 
3. What is the role of the Pension Benefit Guaranty Corporation in
protecting retirement benefits? 
4. What are PBGC’s financial resources to carry out its mission? 
5. To what extent does the Pension Benefit Guaranty Corporation
insure benefits provided by defined benefit plans? 
6. What plan benefits does PBGC guarantee? 

Glossary of Key Terms: 

Related GAO Products: 

Figures: 

Figure 1: Number of Private Defined Benefit and Defined Contribution 
Plans: 

Figure 2: Active Participants in DB and DC plans: 

Figure 3: Growth in the Number of 401(k) Plans: 

Figure 4: Coverage and Participation of Private Sector Employees: 

Figure 5: Vesting Status of Participants in DB and DC Plans: 

Figure 6: PBGC Trusteeship of Terminated Defined Benefit Plans: 

[End of table of table of contents] 

Section 1: Private Pensions and Public Policy: 

Section I provides general information on the public policy framework 
for private pensions, including a broad discussion of standards that 
employers must meet to sponsor plans that qualify for preferential tax 
treatment. 

Q. Why do private employers offer pension plans? 

[Private employers voluntarily offer pension plans to attract and retain
workers and enable workers to take advantage of the tax preferences 
associated with pensions.] 

A. Private employers are not required to offer pension plans for their
employees. The private pension plan system is voluntary; employers 
decide whether to establish a retirement plan and make decisions 
regarding the design, terms and features of the plan or plans they 
choose to sponsor. [Footnote 3] One of the fundamental determinations 
that private employers make if they decide to sponsor a plan relates to 
the level of
benefits that the plan provides. Although private employers are 
motivated to offer a pension plan for many reasons, the most important 
involve (1) the employer’s need to attract and retain a workforce in a 
competitive labor market and (2) the tax advantages, or preferences, 
associated with pensions. [Footnote 4] 

Employers typically want to attract workers, motivate them to perform 
efficiently in pursuit of the firm’s goals, and retain them to reduce 
the costs associated with turnover. Pensions provide a tool for 
accomplishing these objectives. For example, pensions are a means of
providing deferred compensation that may encourage workers to make long-
term commitments to employers. At the same time, employers also want to
manage the retirement of their workforce, and pensions are a means of
offering incentives for workers to retire sooner or later than they 
would otherwise. 

Employers also choose to sponsor pension plans because of the favorable
federal tax treatment of contributions that employees make and the 
investment returns on these contributions. While workers’ cash earnings 
are taxed immediately, pension plan participants typically do not 
include their employer’s or their own contributions (and the investment 
earnings on these contributions) to a qualified plan in determining 
their tax liability until they receive benefits. The employer is also 
entitled to a current deduction (within certain limits) for 
contributions to a tax-qualified plan even though contributions are
not currently included in an employee’s income. 

Q. Who may sponsor a pension plan? 

[Private and public-sector employers may sponsor pension plans for their
employees.] 

A. Private and public-sector employers may sponsor pension plans for 
their employees. [Footnote 5] Employers may sponsor plans either 
individually or collectively. A single-employer plan is a plan that is
established and maintained by only one employer. Single-employer plans 
can be established unilaterally by the sponsor or through a collective 
bargaining agreement with a labor union. Generally, the sponsoring 
single-employer has the ultimate responsibility for the administration 
of the plan (pension plans that may be sponsored jointly by two or more 
employers are discussed below). A plan that is collectively sponsored 
by two or more employers may be sponsored through a collective 
bargaining agreement with a labor union (i.e., union contract) or by a
professional or trade association. Two or more employers who 
collectively sponsor a plan are not required to enter into a collective 
bargaining agreement with a union. 

Q. What is a multiemployer plan? 

[A multiemployer plan is a collectively bargained arrangement between a 
labor union and a group of employers in a particular trade or 
industry.] 

A. Since the passage of the National Labor Relations Act in 1935, 
collective bargaining has been the primary means by which U.S. workers 
can negotiate, through unions, the terms of their pension plan, in 
addition to other employee benefits. Collective bargaining is a process 
that consists of negotiations between representatives of organized 
workers and one or more employers. Typically labor and management 
negotiate the terms of employment, which include benefits such as 
salary increases, work rules, health care, and pension plan 
contributions and accrual rates. 

Multiemployer plans typically cover groups of workers in the unionized
sector of such industries as trucking, building and construction, 
clothing and textiles, food and commercial workers, among others. 
Management and labor representatives must jointly govern these plans, 
in which participants can negotiate the plan benefits through a union. 
Workers can continue to participate in the plan when they change jobs
if their new employer also participates as a plan sponsor. These plans 
offer a means for workers in industries where job change is frequent to 
build up pension rights over a career. Multiemployer plans may provide 
the same annual retirement benefit to all participants with the same 
amount of service, regardless of pay level, or individual employers who 
participate in a multi-employer plan may set employer-specific benefit 
levels for their participants. 

Multiemployer plans should not be confused with multiple-employer 
plans. [Footnote 6] Multiple-employer plans are typically established 
without collective bargaining agreements. Generally, separate accounts 
are maintained for each employer-sponsor so that an individual 
employer’s contributions provide benefits only for the employees of the
contributor. Multiple-employer plans may provide advantages to employers
in certain trades or professions, such as pooling plan assets for 
investment purposes and reducing the cost of plan administration. 

Q. What types of pension plan arrangements can private employers 
sponsor for their employees? 

[Private employers can sponsor qualified plans and nonqualified 
deferred compensation plans or arrangements.] 

A. To encourage employers to establish and maintain pension plans for 
their employees, the federal government provides preferential tax 
treatment under the Internal Revenue Code for plans that meet 
applicable requirements. A qualified pension plan is a retirement plan 
that satisfies certain requirements set forth in the Internal Revenue 
Code of 1986 (IRC or “Tax Code”). [Footnote 7] In order to be tax-
qualified, private pension plans must satisfy a number of requirements, 
including minimum requirements on coverage and benefits (requirements 
on who is covered by plans and how plans must provide benefits are 
discussed in section IV). These minimum benefits and coverage 
requirements are intended to ensure that rank-and-file employees, not 
merely a top group of highly paid employees such as owners and 
executives, participate in and receive benefits from the plan. Plan
sponsors must provide coverage and benefits in a manner that generally 
does not discriminate against workers who are not among an employer’s 
officers, executives, or highly compensated employees. 

Employers who sponsor tax-qualified plans are entitled to a current 
deduction (within certain limits) for the contributions they make to 
their plan even though the contributions are not currently included in 
an employee's taxable income. This means that an employer who sponsors 
a tax-qualified defined benefit plan is generally allowed to deduct 
contributions that it makes to the plan’s trust fund from its taxable 
income; an employer who sponsors a tax-qualified defined contribution
plan is generally allowed to deduct contributions that it makes to 
participants’ accounts from its taxable income (defined benefit and 
defined contribution plans are discussed below in section II). In 
addition to favorable tax treatment for contributions, taxes on the 
investment earnings on employer and employee contributions to qualified
plans are deferred until plan participants receive their benefits. 

Employees do not include the benefits they accrue in qualified plans in 
their gross incomes until the benefits are distributed. Employer 
contributions and employee pretax contributions are not included in an 
employee’s income at the time the contributions are made. Thus, tax 
deferral on contributions and earnings is provided from the time that
contributions are made to the plan until the time that plan 
participants receive benefits. 

[A plan of deferred compensation that satisfies the applicable 
provisions of the Tax Code is termed a "qualified retirement plan." The
Tax Code classifies qualified pension plans as either defined benefit 
or defined contribution plans and includes separate requirements for 
each type of plan.] 

Private pension plans must also generally meet the requirements of the
Employee Retirement Income Security Act of 1974 (ERISA). [Footnote 8] 
Title I of ERISA, among other requirements, contains requirements 
regarding information that plan sponsors must provide to participants 
and defines the obligations of the individuals who administer employer-
sponsored plans. The Employee Retirement Income Security Act also sets 
standards concerning how long an employee must work before becoming 
eligible to participate in a plan (participation), how long a plan 
participant must wait until receiving a right to benefits that cannot 
be taken away (vesting), and minimum funding rules for defined benefit 
plans (and certain defined contribution plans) that require plan 
sponsors to provide funding for the benefits participants are entitled 
to receive (funding). These standards are contained in title I of 
Employee Retirement Income Security Act, and are also part of the 
Internal Revenue Code (section III and section IV below discuss 
specific requirements that qualified plans must satisfy in greater 
detail). 

Nonqualified pension plans are plans that do not meet the applicable 
requirements for tax-qualification under the Tax Code. Sponsors of 
nonqualified plans typically do not have to satisfy laws and 
regulations requiring a minimum level of benefits or contributions to 
the plan. Additionally, sponsors of nonqualified plans do not have to
meet certain reporting, disclosure, bookkeeping, and core fiduciary
requirements. Nonqualified plans are also typically designed for highly
compensated employees or selected company executives, and are typically
not meant to cover the broad spectrum of employees that a qualified plan
covers. However, certain nonqualified plans may be subject to the 
Employee Retirement Income Security Act’s title I provisions (see 
section III for more detail on ERISA). 

Q. What are the tax advantages of sponsoring a qualified plan? 

[There are several tax advantages that employers and employees receive 
for making contributions to a tax-qualified plan.] 

A. The favorable tax treatment accorded a qualified pension plan 
includes: 

* the amount that the employer contributes to the plan is tax deductible
(within certain limits) in the year contributions are made; 

* the earnings on the investment of plan assets are tax-exempt; 

* participants do not have to pay income tax on the employer’s 
contribution to the plan on their behalf or on the earnings to those 
contributions until benefits are received; 

* income taxes on certain distributions may be deferred by rolling over 
the distribution into an Individual Retirement Account or to another
qualified plan; and; 

* installment or annuity payments (section II discusses these types of
benefit payments provided by pension plans) are taxed only when the 
participant receives them. 

Q. What is the process by which plan sponsors obtain tax-qualified 
status? 

[Private plan sponsors may obtain tax-qualified status by applying to
the Internal Revenue Service (IRS).] 

A. By applying to the Internal Revenue Service, a private employer is 
seeking an advance determination as to the qualified status of its plan 
rather than waiting for the IRS to review its plan in connection with 
an audit. Upon review of the plan sponsor’s application, the Internal 
Revenue Service provides a determination letter to the employer. A 
favorable letter of determination provides the plan sponsor with IRS’
opinion that the terms of the plan conform to the requirements of the
Internal Revenue Code. Employers are not required to apply to the 
Internal Revenue Service to receive preferential tax treatment as long 
as the terms and operation of their plans meet the applicable Internal 
Revenue Code standards. However, employers who do not apply to the 
Internal Revenue Service do not get the advantage of a favorable 
determination letter, which affords the employer some assurance that if 
the plan operates in accordance with the terms that IRS reviewed, then 
the plan is qualified. 

Q. What laws govern private pension plans? 

[Generally, private plans must meet the standards and requirements set 
forth under the Employee Retirement Income Security Act. In order for a 
plan to be tax-qualified, or for contributions to the plan and 
investment earnings on those contributions to be eligible for deferral 
of federal income taxes, the plan must also comply with relevant 
provisions of the Internal Revenue Code.] 

A. The Internal Revenue Code of 1986 and the Employee Retirement Income
Security Act of 1974, as amended, set forth standards and requirements 
that generally apply to private pension plans. [Footnote 9] The Tax 
Code and the Employee Retirement Income Security Act contain certain 
requirements that are similar in delineating standards and rules 
private plan sponsors must satisfy. For example, both the Tax Code and 
the Employee Retirement Income Security Act impose minimum requirements
regarding employee participation in plans and requirements regarding 
when participants receive a right to benefits that cannot be taken 
away. Additionally, both the Tax Code and the Employee Retirement 
Income Security Act include separate requirements that private plan 
sponsors must satisfy. For example, the Tax Code contains 
nondiscrimination provisions that are intended to ensure qualified 
pension plans provide benefits to a broad group of employees, while the 
Employee Retirement Income Security Act contains standards that govern 
the conduct of pension plan fiduciaries. Fiduciaries are the 
individuals with discretionary authority or control over the operation 
of a pension plan and/or the investment of plan assets. 

Q. Which agencies are responsible for enforcing federal laws and
regulations that govern private pension plans? 

[The Internal Revenue Service, the Department of Labor's Pension and
Welfare Benefits Administration (PWBA), and the Pension Benefit 
Guaranty Corporation (PBGC) are primarily responsible for enforcing
laws that govern private pension plans.] 

A. The Internal Revenue Service enforces standards for coverage and
participation, vesting, and funding under the Internal Revenue Code 
that, respectively, determine the extent to which employees must 
participate and how employees become eligible to participate in benefit 
plans, define how participants become eligible to earn rights to 
benefits, and the minimum amount that plan sponsors must contribute to 
their plans. [Footnote 10] IRS also enforces provisions of the Internal
Revenue Code that apply to tax-qualified pension plans under section 
401(k) of the Code. The Pension and Welfare Benefits Administration 
enforces the Employee Retirement Income Security Act’s reporting and 
disclosure provisions and fiduciary responsibility standards, which 
among other things concern the type and extent of information provided 
to the federal government and plan participants and how pension plans 
are operated in the interests of plan participants. The Pension Benefit
Guaranty Corporation is a federally chartered organization (established 
by title IV of ERISA) that insures the benefits of participants in 
certain defined benefit pension plans (see section V for a discussion 
of The Pension Benefit Guaranty Corporation and the insurance it 
provides). 

The Department of Labor (DOL) and the Internal Revenue Service have 
various mechanisms to enforce the requirements and standards private
plans must satisfy. For example, DOL may initiate administrative 
actions or lawsuits to ensure that plans comply with relevant 
provisions of the Employee Retirement Income Security Act. The Internal 
Revenue Service can disqualify a plan (or revoke its tax-preferred
status) when the plan fails to meet applicable provisions of the 
Internal Revenue Code. As an alternative to disqualification, the 
Internal Revenue Service may impose sanctions and require the plan 
sponsor to correct any violation of applicable rules and regulations. 
IRS has established procedures to identify and remedy “qualification
failures,“ or instances of noncompliance with Internal Revenue Code 
requirements. Both agencies have voluntary compliance programs to 
encourage plan sponsors to identify and correct compliance violations. 

[End of section] 

Section 2: Types of Pension Plans Employers May Sponsor: 

Section II describes the types of pension plans that private employers 
may sponsor and explains key differences in how certain pensions 
provide benefits. [Footnote 11] 

Q. What is a defined benefit plan? 

[A defined benefit plan promises to provide a benefit that is generally
based on an employee's salary and years of service]. 

A. Defined benefit plans use a formula to determine the ultimate 
pension benefit that participants are entitled to receive. Typically, 
benefit formulas are either based on an employee’s final average pay or 
career average pay in combination with the participant’s years of 
service and a multiplier, or percentage factor that is part of the 
formula. 

Defined benefit plans usually express benefits as an annuity, or series 
of periodic payments over a specified period of time or for the life of 
the participant, beginning at a normal retirement age specified by the 
plan. Plans typically specify normal retirement age as 65. For example, 
a final average pay formula might determine monthly benefits payable at 
retirement on the basis of 1.25 percent multiplied by years of service 
completed multiplied by the participant’s average salary over the last
5 years of service. [Footnote 12] Typically, annuity payments are 
received on a monthly basis by the retired participant and continue as 
long as the recipient lives. An annuity is the normal form of benefit
payment that defined benefit plans provide to participants. 

[Example of defined benefit plan formula used to determine annual 
pension benefits: 1.25 percent (multiplier) x 25 (years of service 
completed) x $65,000 (average of employee's final 5 years' annual 
salaries) = $20,313 (annual pension benefit commencing at normal 
retirement age)]. 

Plan sponsors must offer married participants a joint and survivor
annuity payment at retirement (joint and survivor annuities are 
discussed below). Defined benefit plans may also offer those 
participants (who have a nonforfeitable right to accrued benefits
under the plan) the option of receiving their accrued benefits as a 
lump sum distribution, or a nominal cash amount, when they leave the 
plan sponsor before or at retirement (see below in this section). 
[Footnote 13] Participants may elect to receive a lump sum amount only 
if the plan provides this benefit payment option and if spousal consent 
is obtained. If a participant receives a lump sum distribution, he or 
she may “roll-over” the amount directly to another qualified retirement
plan, such as an Individual Retirement Account or a defined 
contribution plan. An Individual Retirement Account is a retirement 
savings arrangement authorized by the Employee Retirement Income 
Security Act of 1974 and the Internal Revenue Code. Banks and other 
financial institutions may make these arrangements available to 
workers. Individual Retirement Accounts allow workers to make tax-
deductible and/or nondeductible contributions to an individual account. 

The employer, as plan sponsor, is responsible for making contributions
that are sufficient for funding the promised benefit, investing and 
managing the plan assets, and bearing the investment risk. Defined 
benefit plan sponsors make contributions to a pension trust fund that 
is invested on behalf of employees in the plan. Employer contributions
to a defined benefit plan must satisfy minimum funding requirements set 
forth in the Employee Retirement Income Security Act. Minimum funding 
standards establish the minimum amounts that defined benefit plan 
sponsors must contribute to ensure that their plans have sufficient
assets to pay benefits when due. The minimum funding standards, while 
technically complex, are designed to ensure that the value of benefits 
accumulated to date under the plan and the plan’s assets bear a 
reasonable relationship to one another such that the plan can pay 
benefits due participants when they retire. The standards also provide
flexibility to increase or decrease a plan’s funding as that 
relationship deteriorates or improves, respectively. Generally, if a 
defined benefit plan terminates with assets that are insufficient to 
pay the benefits accrued to date, the Pension Benefit Guaranty 
Corporation pays benefits promised by the plan up to levels specified 
by law (insurance for defined benefit plans is discussed in section V). 

Q. What is a defined contribution plan? 

[Under a defined contribution plan, employees have individual accounts
to which the employer, employees, or both make periodic contributions]. 

A. Defined contribution plan benefits are based on the contributions to 
and investment returns (gains and losses) on individual accounts. For 
each participant, the plan sponsor periodically contributes a specific 
dollar amount or percentage of pay into each participant’s account. 
Depending on the design of the plan, contributions may consist of 
pretax or after-tax employee contributions, employer matching 
contributions (i.e., employer contributions that are made only if an 
employee makes contributions to the plan), and other employer 
contributions that may be made independent of any participant 
contributions. Defined contribution plans provide benefit portability
because they typically pay benefits to participants by distributing 
their current account balances, in full, when they leave their employer 
to change jobs or retire. These lump sum distributions may be rolled-
over into another qualified retirement plan, such as another defined 
contribution plan or Individual Retirement Account (see below in this 
section). Unlike defined benefit plans, defined contribution plans are 
not required to provide an annuity option to participants. 

[Example of annual increase in defined contribution plan account 
balance: $20,000 (beginning of year account balance) + 6 percent of 
$50,000 salary (employee contribution) + 3% of $50,000 salary (employer
contribution) + 6% investment return (earnings on beginning of year 
account balance) = $25,700 end of year account balance.] 

[Note: This example is simplified. Contributions may be made to 
individual accounts during the course of the year; such contributions
begin to earn interest immediately upon being deposited in 
participants' accounts.] 

In a defined contribution plan, the employee bears the investment risk 
and often controls, at least in part, how his or her individual account 
assets are invested. Defined contribution plan participants realize any 
investment returns, or gains or losses on the investment of assets in 
their account balances. Defined contribution plan participants do not 
have insurance protection against the risk of losses they may incur on 
the investment of their account balances. 

In addition to lump sum distributions that a participant may receive 
from a defined contribution plan when he or she changes jobs, a defined 
contribution plan may also allow pre-retirement access to participant 
account balances while they are working for the employer. For example, 
a defined contribution plan may allow participants to take out a loan 
on the portion of their account balance that is vested (see section IV 
for a discussion on vesting). A defined contribution plan may also 
permit pre-retirement withdrawals under certain conditions, such
as financial hardship or the purchase of a home. 

[Defined contribution plans are classified into one of three main 
types: profit-sharing, stock bonus, or money purchase plans.] 

A profit-sharing pension plan is a type of defined contribution plan 
that provides for contributions to employees on the basis of employer 
profits. Profit sharing plans were originally created as a means to 
enable employees to share in the profits of their employer’s business.
However, under current law, employers who sponsor these plans may make 
contributions regardless of whether they are profitable. Profit-sharing
plans may provide for annual employer contributions based on profits 
from the previous year or may provide that contributions are made each 
year at the discretion of the employer. Profit-sharing contributions
are not paid out currently but are deferred to individual accounts the
employer has established for each employee. 

Profit-sharing plans provide for employer contributions to participants
on the basis of a contribution formula, which specifies how the 
sponsor’s contribution is determined. The contribution formula is 
generally based on employee compensation but may be based on employer 
profits or employee contributions. For example, profit-sharing plans 
can specify that contributions to participant accounts are based on a 
flat percentage of pay or determined by calculating the proportion of
each employee’s compensation relative to the total compensation of all 
participants. Profit-sharing plans must also specify the events upon 
which distributions will be made to participants, such as separation 
from service with the employer or retirement. Profit-sharing plans may 
provide benefit payments to participants while they are working. 

A stock bonus plan is similar to a profit-sharing plan except that the 
plan benefits are payable in the form of employer stock. Stock bonus 
plans may make benefit payments in cash amounts but must permit 
participants to receive their benefit payments in the form of employer 
stock. If the plan sponsor pays benefits with shares of company stock 
that are not readily tradable on an established financial market, the 
participant must be allowed to sell the shares back to the employer at 
a fair market price. This requirement ensures that benefits provided in 
the form of company stock have some financial value to participants. 

A money purchase plan is a defined contribution plan where the plan 
sponsor is required to make contributions. The required contribution 
that the sponsor must make on behalf of each participant is based on 
the plan’s formula, which is specified in the plan’s document. These 
contributions are generally determined as a specified percentage of a 
participant’s salary. Retirement benefits are equal to the amount in a 
participant’s account at retirement. Similar to qualified defined 
benefit plans, money purchase plans must satisfy minimum funding 
requirements because employer contributions are mandatory. A money 
purchase plan may not provide for benefit payments that may be made to 
participants while they are working for that employer except in the 
event of plan termination. 

Within these types of defined contribution plans, plan sponsors may add 
special features, such as a qualified cash-or-deferred-arrangement 
(“401(k) Plan”) or an Employee Stock Ownership Plan (ESOP) feature. 
Both of these qualified plan features are discussed below. 

Figure 1: Number of Private Defined Benefit and Defined Contribution 
Plans: 

[See PDF for image] 

This figure is a multiple line graph depicting the number of private 
defined benefit and defined contribution plans. The vertical axis of 
the graph represents the percentage of private wage and salary workers 
who actively participate in three categories: (10 defined benefit 
plans, (2) defined contribution plans, and (3) all private plans. The 
horizontal axis represents years from 1979 through 1998. 

Source: Private Pension Plan Bulletin: Abstract of 1998 Form 5500 
Annual Reports (table E1),U.S. Department of Labor, Pension and Welfare 
Benefits Administration. 

[End of figure] 

Q. What types of contributions can be made to defined contribution
plans? 

[Both plan sponsors and employees may make contributions to defined
contribution plans.] 

A. There are several types of employer and employee contributions that 
may be made to tax-qualified defined contribution plans. Employers may 
make nonelective and/or matching contributions to defined contribution 
plans. Nonelective contributions are contributions that the plan 
sponsor makes regardless of whether the participant makes 
contributions. These contributions are made independently of any 
employee contributions. Nonelective contributions may be provided on a
regular or discretionary basis according to the terms of the plan. 
Matching contributions are contributions that a plan sponsor makes only 
when participants make contributions. The level of matching varies 
among plan sponsors. Employers that make matching contributions may 
make these contributions in shares of the employer’s stock without the 
option to direct the investment of these contributions until certain 
conditions -- relating to the participant age and/or service -- are
met. 

Employees, in accordance with plan provisions, may contribute on a 
pretax or after-tax basis to defined contribution plans. Employee 
pretax contributions are generally treated the same for income tax 
purposes as employer contributions. Unlike pretax contributions, after-
tax contributions are included in the participant’s taxable income for 
the year the contributions are made, however, taxation of the 
investment income earned on such contributions is deferred until it is
received. 

Q. What is the accrued benefit provided by defined benefit and defined 
contribution plans? 

[For defined benefit plans, the accrued benefit is the amount that the 
plan participant would receive annually as a life annuity beginning at 
the plan's normal retirement age. A participant’s accrued benefit is 
determined by the plan’s benefit formula. This amount is calculated for 
each year as a participant completes an additional year of service with 
the plan sponsor. For defined contribution plans, the accrued benefit 
is the balance of a participant's individual account. This balance 
includes the sum of participant and/or employer contributions and 
investment returns (gains or losses), dividends, and capital gains (or 
losses) attributable to those contributions. Also, the account balance 
is less any administrative expense that participants must incur to 
maintain the account.] 

A. For defined benefit plans, the plan formula determines the rate at 
which the accrued benefit grows on a yearly basis. Defined benefit 
plans generally express accrued benefits as an annuity, or series of 
periodic payments that begin at retirement for a specified period of 
time or the life of the recipient. Defined benefit plan participants
are required to have the option of receiving their accrued benefits as 
an annual benefit for the rest of their lives beginning at retirement, 
or the plan’s normal retirement age. Participants, however, must work 
for a certain period of time in order to earn a right to their accrued 
benefits under the terms of the plan before they are entitled to 
receive their benefits. This is called vesting (vesting is discussed in 
Section IV). If a participant’s benefit is paid as an amount other than 
an annual benefit commencing at normal retirement age, the plan sponsor 
must pay the accrued benefit as a lump sum amount in current dollars. A 
lump sum distribution is the present value of the annuity benefit 
payment stream that the participant would receive at retirement. Lump
sum benefit payments must be (actuarially) equivalent to the annuity 
benefit that the participant has accrued to date under the plan’s 
benefit formula. [Footnote 14] Lump sum distributions may be paid only 
if they are provided for under the terms of the plan, and the departing
participant elects this form of payment. 

Defined contribution plan benefits generally accrue when contributions
are allocated to individual participant accounts. However, participants 
are only entitled to the contributions they have made (and any 
investment returns on these contributions) and not those that have been 
made by their employer until they meet certain requirements. Similar to 
defined benefit plan participants, defined contribution plan 
participants may have to work for a certain period of time in order to 
earn a right to their employer’s contributions. With respect to a 
participant’s contributions, the accrued benefit is the portion of the
participant’s account balance that is attributable to his or her 
contributions and investment returns (gains or losses) on those 
contributions. 

Q. How may defined benefit and defined contribution plans pay benefits? 

[Defined benefit plans may pay benefits as annuities or lump sum 
distributions, while defined contribution plans may pay benefits as 
annuities, lump sum distributions, or installment payments. Married 
participants who receive annuity payments are generally required to 
receive a joint and survivor annuity.] 

A. Defined benefit and defined contribution plans typically pay out 
accrued benefits at retirement (i.e., at the plan specified normal 
retirement age – commonly age 65), early retirement (usually between 
the ages of 55 to 62) or when an employee separates from service. 

Plan sponsors must meet certain requirements regarding when they must
pay benefits to participants and when participants may request to begin
receiving benefit payments. [Footnote 15] Both defined benefit and 
defined contribution plans may pay benefits as both annuities and as 
lump sums. An annuity is a series of periodic payments that begins at 
retirement [Footnote 16] and continues through a person’s lifetime
and the lifetime of their surviving spouse, if they are married. 

For defined benefit and defined contribution plans married plan 
participants who receive accrued benefits in the form of an annuity are 
normally required to receive joint and survivor annuities. Joint and 
survivor annuities guarantee that the plan participant’s surviving 
spouse will continue to receive payments after the plan participant 
dies. [Footnote 17] The pension income that a surviving spouse receives 
from a qualified joint and survivor annuity must be at least equal to 
one-half of the annuity benefit payment the retired participant 
received. The spouse of the plan participant may waive his or her right 
to a joint and survivor annuity. 

Both defined benefit and defined contribution plans may pay out 
benefits as lump sum distributions (or cash amounts in current 
dollars). Plans that provide lump sum distributions promote benefit 
portability by allowing participants to take their benefits when they 
leave the plan sponsor prior to retirement, such as when a participant
changes jobs. For defined benefit plan benefits the lump sum a 
participant receives must be at least equivalent to the present value 
of a participant’s accrued benefits as calculated using actuarial 
assumptions specified in the Internal Revenue Code. 

Defined contribution plans usually pay benefits in the form of a lump 
sum distribution. For defined contribution plan benefits the lump sum 
amount a participant receives is based on the employee’s contributions 
and the investment earnings on those contributions. If the plan 
participant is vested, the lump sum amount includes the employer’s 
contributions (if any) and the earnings on those contributions. 

Participants who receive accrued benefits as lump sum amounts may or may
not preserve these assets for retirement income purposes. For example, a
participant may elect to receive a lump sum distribution directly from 
his or her plan sponsor. In such instances, the recipient may or may 
not reinvest the amount (after taxes) into another tax-qualified 
retirement plan or other savings instrument. If a departing 
participant, prior to attaining age 59 and 1/2 years, elects to receive 
a lump sum distribution directly and does not have his or her employer 
transfer the amount directly to an Individual Retirement Account or 
another qualified plan, the amount of the distribution is subject to an 
excise tax of 10 percent in addition to ordinary income taxes. To avoid
paying taxes on the distribution, the participant must deposit the 
distribution into an Individual Retirement Account or another 
employer’s qualified retirement plan within 60 days of receiving the 
distribution. Also, the employer is required to withhold 20 percent of 
the lump sum amount if the participant elects to receive it directly. 

Alternatively, participants who receive lump sum distributions may roll-
over, or transfer these amounts into certain retirement plans free of 
taxes. Employers who sponsor qualified plans and enable departing 
participants to receive lump sum distributions must give participants 
the option to have these amounts directly transferred into a Individual 
Retirement Account or another employer’s tax-qualified plan (if that 
plan accepts rollovers). A participant who receives his or her accrued
benefit as a lump sum distribution and elects to roll-over the amount 
preserves the pension benefit as a source of retirement income. 

An employer has the option – without the participant’s consent – to pay
pension benefits as a lump sum distribution when a terminating 
participant has accrued benefits that are worth no more than $5,000 in 
current dollars. Also, if a departing participant receives a lump sum 
distribution worth more than $1,000 but less than $5,000, the 
distribution is automatically rolled-over into an Individual Retirement 
Account, unless the participant elects otherwise. [Footnote 18] 

In addition to taking their benefits as an annuity or lump sum, defined 
contribution plans participants may have a third option. They may also 
have the option of receiving benefits at retirement as a series of 
periodic withdrawals, determining both the amount and frequency of 
these withdrawals under the terms of the plan, until their accounts are
exhausted. These periodic payments are called installments. 

Figure 2: Active Participants in DB and DC plans: 

[See PDF for image] 

This figure is a multiple line graph depicting active participants in 
DB and DC plans. The vertical axis of the graph represents percentage 
of private wage and salary workers who actively participate, from 5 to 
30. The horizontal axis of the graph represents years from 1979 through 
1998. Three lines depict the following: 
* Workers who participate in a DB plan only; 
* Workers who participate in one or more DC plans only; 
* Workers who participate in a DB and a DC plan. 

Source: Private Pension Plan Bulletin: Abstract of 1998 Form 5500 
Annual Reports (table E4b),U.S. Department of Labor, Pension and 
Welfare Benefits Administration. 

[End of figure] 

Q. What is pension portability? 

[Pension portability refers to the ability of plan participants to 
transfer accrued benefits from one plan to another.] 

A. Portability of assets refers to the ability to cash out one’s 
pension benefits before retirement and have them transferred to another 
retirement plan – an Individual Retirement Account or another qualified 
defined contribution plan. Defined contribution plans typically pay 
benefits as lump sum distributions. Defined benefit plans may or may 
not provide separating participants the option of receiving accrued 
benefits as a lump sum amount in cases where accrued benefits are worth 
more than $5,000 in current dollars. Plans that provide lump sum 
distributions must also allow participants to elect a direct “roll-
over” of assets from the plan sponsor to another qualified retirement 
plan. When a participant transfers his or her pension benefits from one 
plan to another defined contribution plan or to an Individual 
Retirement Account, the assets can continue to grow. 

Q. How may workers preserve their pension benefits for retirement? 

[Pension plan preservation refers to efforts to prevent the loss of 
retirement assets when a worker moves from one employer to another.] 

A. Workers may preserve their pension benefits for retirement by either 
leaving their benefits in their previous employers’ retirement plan, or 
rolling them over by transferring the assets directly to another tax-
deferred retirement plan, such as another qualified defined 
contribution plan or an Individual Retirement Account. Workers who do 
not preserve benefits in one of these two ways potentially lose some or
all of the assets they had accumulated and may be subject to certain 
taxes on the distribution. This can occur when a worker receives a lump 
sum benefit payment and decides to spend, rather than save, some of the 
distribution or the entire amount. Both the 10 percent excise and 20 
percent employer withholding tax on lump sum distributions that are 
paid directly to the employee are intended to encourage the preservation
of pension assets. 

Q. Who operates an employer-sponsored pension plan? 

[Responsibility for all aspects of the plan's operations, including the
management of its assets, ultimately rests with the plan fiduciary.] 

A. A fiduciary is any person who exercises discretionary authority or 
control with respect to management or disposition of plan assets, 
renders investment advice for a fee or compensation, or has 
discretionary responsibility in the administration of the plan. 

Fiduciaries may include executives and senior management of the employer
depending on the functions they perform with respect to the plan. Some
employers have a collective bargaining unit (union) covering their 
workforce. [Footnote 19] When there is a union, typically the union and 
the employer may negotiate the design and operation of the pension 
plan. [Footnote 20] 

A private employer may adopt any change to its plan by amending the 
terms of its plan so long as the plan’s operation continues to satisfy 
the requirements for tax-qualification (and title I of the Employee 
Retirement Income Security Act). Changes to the features, operation, 
and terms of the plan are not considered to be fiduciary 
responsibilities (fiduciaries and their obligations are discussed in 
section III). If an employer changes its plan and the change violates 
one or more provisions of the Internal Revenue Code relating to plan 
qualification, the Internal Revenue Service can pursue disqualification 
of the plan. The main constraint on an employer’s ability to modify the 
terms and operation of its plan is the general prohibition on reducing 
or eliminating participants’ accrued benefits (section IV discusses the 
rules that govern the extent to which an employer can reduce or 
eliminate accrued benefits). 

Q. What is a 401(k) pension plan? 

[A "401(k) plan" is a type of defined contribution plan that contains a
401(k) feature, which generally allows participants to make pre-tax 
contributions to individual accounts.] 

A. When a profit-sharing or stock bonus defined contribution plan 
includes a 401(k) feature it is referred to as a “qualified cash or 
deferred arrangement” (CODA). Such plans, generally called 401(k) 
plans, must generally satisfy the rules and requirements applicable
to all qualified pension plans and to 401(k) plans in particular. These
arrangements allow employees to elect to reduce part of their current 
compensation to save for retirement income purposes. 

Private employers may sponsor 401(k) plans that allow employees to 
choose to contribute a portion of their current compensation, on a 
pretax basis, to a qualified retirement account. These tax-deferred 
contributions are made to individual 401(k) plan accounts on a pretax 
basis instead of receiving the same amount as taxable salary. 

[Employees' pre-tax contributions to a 401(k) plan are commonly referred
to as "elective contributions" or "elective deferrals."] 

Investment income earned on 401(k) account balances accumulates tax-free
until the individual withdraws the funds at or prior to retirement. 
Many 401(k) plan sponsors provide matching contributions to 
participants who make elective contributions. Employer matching 
contributions are often made in whole or in part up to some percentage 
of the employee’s base salary. Matching contributions can be made in 
the form of shares of the employer’s stock. Plan sponsors, however, are 
not required to provide a match. 

In a typical 401(k) plan, employees must elect to participate by 
authorizing the employer to make payroll salary reductions. Typically, 
participants may allocate the investment of their account balances 
among a menu of investment options selected by the employer and/or 
fiduciaries appointed by the employer. The pension benefits that a 
participant receives depend on the balance in his or her 401(k) plan 
account, which is based on the contributions to and the investment 
returns or losses on the assets in the account. Employer stock can be 
one of the 401(k) plan’s investment options. In 2002, 401(k) plan 
participants can elect to contribute up to the legal limit of $11,000 
on elective deferrals (gradually increasing to $15,000 in 2006). 
[Footnote 21] Also, 401(k) plan participants age 50 and older may make 
an additional annual, pre-tax “catch-up” contribution to their 
individual accounts up to a certain legal limit. 

Figure 3: Growth in the Number of 401(k) Plans: 

[See PDF for image] 

This figure is a multiple line graph depicting the growth in the number 
of 401(k) plans from 1984 through 1998. The left vertical axis of the 
graph represents number of plans from 0 to 800,000. The right vertical 
axis represents 401(k) plans as a percentage of DC plans, from 0 to 50. 
The horizontal axis of the graph represents years from 1979 through 
1998. Lines on the graph depict the following data: 
* Number of 401(k) plans; 
* Number of private defined contribution plans; 
* 401(k) plans as a percentage of all DC plans. 

Source: Private Pension Plan Bulletin: Abstract of 1998 Form 5500 
Annual Reports (tables E1 and E23),U.S. Department of Labor, Pension 
and Welfare Benefits Administration. 

[End of figure] 

Q. What is an Employee Stock Ownership Plan (ESOP)? 

[An Employee Stock Ownership Plan (ESOP) is a defined contribution plan
feature that requires the plan sponsor to invest plan assets primarily 
in shares of the sponsor's stock.] 

A. Through an Employee Stock Ownership Plan, the employer makes tax-
favored contributions of company stock to individual participant 
accounts. 

[Employees do not actually buy shares in an Employee Stock Ownership 
Plan. Instead, the company contributes its own shares to the plan, 
contributes cash to buy its own stock (often from an existing owner), 
or, most commonly, has the plan borrow money to buy stock to contribute 
to the plan, with the company repaying the loan.] 

In general, Employee Stock Ownership Plans must meet the requirements 
for tax-qualified status under the Internal Revenue Code, such as rules 
that govern coverage, participation, and vesting, but are exempt from 
certain fiduciary requirements (e.g., diversification of plan assets). 
Employee Stock Ownership Plans must also satisfy additional 
requirements that apply specifically to ESOPs. For example, Employee
Stock Ownership Plans must primarily invest plan assets in employer 
stock and are obligated to furnish participants with certain rights 
regarding the stock contributions they receive. Employee Stock 
Ownership Plans can qualify for favorable tax treatment as either a
stock bonus plan or as a combination stock bonus and money purchase 
plan. 

An Employee Stock Ownership Plan may be designated by the sponsor as a
separate pension plan or be combined with another pension plan such as a
profit-sharing plan or a 401(k) plan. An employer who sponsors both an
Employee Stock Ownership Plan and a 401(k) plan may use their ESOP 
contribution to purchase employer stock and match employee 
contributions to the 401(k). An employer who sponsors such a plan may 
also make a matching contribution to the 401(k) plan directly; the plan 
sponsor may require the matching contribution to be invested in the 
employer’s stock. Alternatively, an employer who sponsors a 401(k) plan
and an ESOP may use the participants’ elective contributions to purchase
employer stock or repay a loan whose proceeds have been used to purchase
employer stock from the plan. 

Employee Stock Ownership Plans are classified as “leveraged” and 
“nonleveraged.” A leveraged Employee Stock Ownership Plan is a plan 
that has borrowed money to purchase employer stock. To do this a plan 
sponsor may take out a loan and then lend the proceeds of the loan to 
the ESOP. Alternatively, the Employee Stock Ownership Plan may borrow 
from a lender with the plan sponsor guaranteeing the loan. The Employee 
Stock Ownership Plan in turn uses the borrowed funds to buy company 
stock. An Employee Stock Ownership Plan loan is secured by employer-
held stock and the employer makes annual cash contributions to the 
ESOP, which the Employee Stock Ownership Plan uses to repay the loan. 
Each year, the sponsor pays off a portion of the loan and interest on 
the loan as it makes tax-qualified contributions to the Employee Stock 
Ownership Plan. As the employer makes these contributions, shares of 
stock are allocated to participant accounts. 

A nonleveraged Employee Stock Ownership Plan may obtain stock gradually
through employer contributions or receive a large block of stock through
an “immediate allocation loan.” An employer who sponsors a nonleveraged
Employee Stock Ownership Plan may make periodic contributions to the
plan’s trust. The sponsor may contribute stock or cash, which the trust 
fund uses to purchase stock. The stock in the trust fund is then 
allocated to participant accounts. The employer may take out an 
immediate allocation loan to buy company stock with borrowed funds; the 
shares are transferred immediately to the ESOP, which in turn allocates 
the shares immediately to Employee Stock Ownership Plan participants. 
Thus, the ESOP itself has not borrowed money to pay for company stock 
and is not leveraged. 

Q. What are hybrid pension plans? 

[Hybrid pension plans are plans that contain features of both defined
benefit and defined contribution plans.] 

A. Hybrid plans combine certain features of defined benefit and defined
contribution plans. For example, a hybrid plan may provide benefits 
based on a formula like a defined benefit plan, but pension benefits are
expressed as an account balance like a defined contribution plan. A cash
balance plan is a hybrid defined benefit plan that uses a formula to 
determine benefits but expresses benefits as account balances (see 
below in this section). Alternatively, a hybrid plan may be a defined 
contribution plan in which contributions are based on a definite 
benefit formula. 

Q. What is a pension plan floor-offset arrangement? 

[Floor-offset arrangements are a type of hybrid plan that consists of
two separate, but associated pension plans-a defined benefit "floor" 
plan and a defined contribution "offset" plan.] 

A. The defined benefit plan provides a minimum level of benefits based 
on a typical formula (for example, final average pay formula based on 
years of service and an average annual earnings over a specified number 
of years). These benefits are expressed as a series of payments 
commencing at the plan-specified normal retirement age. Benefits 
provided by the defined benefit formula represent the minimum level,
or the “floor,” of total pension benefits that a plan participant is 
entitled to under the arrangement but are offset by benefits under a 
defined contribution plan. The defined contribution plan (“offset” 
plan) establishes individual accounts for participants to which the
employer and/or participant may make contributions. A participant’s 
account balance determines whether or not he or she receives a benefit 
from the defined contribution plan only or both the defined benefit and 
the defined contribution plans. 

If the defined contribution plan provides a total benefit that equals or
exceeds the benefit provided by the defined benefit floor plan, the 
participant receives (only) the accumulated balance in his or her 
defined contribution plan account. In the event that a participant’s 
defined contribution account balance provides a benefit that is less 
than the benefit from the defined benefit plan, the defined benefit plan
makes up the difference between the benefit it provides and the amount 
the participant has accumulated in the defined contribution plan. 
Therefore, participants receive a total benefit, which is the greater 
of the benefit from the defined benefit or the defined contribution 
plan. In 1987, Congress limited the use floor-offset arrangements that 
are invested significantly in employer securities. However, plans in 
existence when the provision was enacted were grandfathered. 

Q. What is a cash balance plan? 

[A cash balance plan is a hybrid plan that is legally classified as a 
defined benefit plan because participants' benefits are determined by a 
benefit formula. However, a cash balance plan has certain features, 
such as hypothetical "individual accounts," that make it resemble a 
defined contribution plan.] 

A. Unlike traditional defined benefit plans, cash balance plan formulas 
regularly credit a percentage of salary or compensation for each 
participant (pay credit) and credit investment earnings or interest on 
these amounts at a rate or index of rates specified by the plan 
(interest credit). For example, a cash balance plan formula might base 
benefits on an annual pay credit of 6 percent of employee salary and 
wages and an annual interest credit equal to the rate of return on 30-
year Treasury bonds. These pay and interest credits are credited to 
hypothetical participant “accounts,” which express benefits as a 
current account balance rather than an annuity beginning at retirement. 
Cash balance plan participants who separate from their employers prior 
to retirement are generally able to take their current account balances 
(accrued benefit) in the form of a lump sum distribution from the plan. 
These features make cash balance plans appear similar to defined 
contribution plans. 

[Example of annual increase in hypothetical account balance under a 
cash balance plan formula: $10,000 beginning of year account balance + 
6 percent of 50,000 salary (pay credit) + 6% interest on beginning of 
year account balance (interest credit based on 30-year Treasury bond 
yield) = $13,600 end of year account balance.] 

Federal law treats cash balance plans as defined benefit plans because 
cash balance benefits are not based on actual individual account 
earnings. [Footnote 22] The normal form of benefit under a cash balance 
plan – like all defined benefit plans – must be an annuity benefit that 
commences at retirement. Benefits under cash balance plans, as with 
other defined benefit plans, are paid from funds invested by the 
employer in a pension trust on behalf of all participants. However, 
participants’ hypothetical account balances receive interest credits 
that do not depend on the actual investment returns on plan assets. Plan
participants neither own these accounts nor make investment decisions
regarding the account balances. Cash balance plans, like other defined 
benefit plans, must comply with minimum funding standards. 

Q. What pension plans are available to governmental employees? 

Governmental employers may and do offer defined benefit and defined 
contribution plans to provide pension benefits to their employees. The 
federal government and state and local governments offer defined 
benefit and defined contribution plans that are generally similar to 
privately-sponsored defined benefit and defined contribution plans.
However, the Employee Retirement Income Security Act does not cover
governmental plans. 

[End of section] 

Section 3: The Role of ERISA: 

Section III describes how the Employee Retirement Income Security Act 
of 1974 protects private pension participants. This section highlights 
standards that define the obligations of individual who run plans and 
requirements that govern the investment of plan assets. [Footnote 23] 

Q. What is the Employee Retirement Income Security Act (ERISA) of 1974? 

[The Employee Retirement Income Security Act of 1974 (ERISA) is a 
federal law that sets certain minimum standards for pension plans 
sponsored by private employers.] 

A. Among other things, ERISA does the following with respect to private
pension plans: 

* Requires plans to provide information to participants and the federal
government about the plan including information about plan features, 
such as benefits they provide, summary financial information, and 
information about how the plan is funded (these requirements are
discussed in more detail later in this section); 

* Sets minimum standards regarding who can participate and when they
can participate (participation), how long participants must wait to 
begin accruing pension benefits (benefit accrual), how long a 
participant must wait before they have a right to benefits that cannot 
be taken away (vesting), how much must be set aside each year to 
provide benefits when they are due (funding); 

* Sets responsibility standards and requires accountability for the
people who run or provide investment advice to plans (plan 
fiduciaries); 

* Allows participants to sue for benefits when those who run or provide
investment advice to the plan fail to meet their duties and 
obligations; 

* Guarantees payment of certain benefits if a defined benefit plan is 
terminated without sufficient assets to pay accumulated benefits, 
through a federally chartered corporation, known as the Pension Benefit 
Guaranty Corporation, which provides insurance protection (subject to
certain limits) to plan participants; and; 

* Gives the Secretary of Labor the authority to bring legal actions to
enforce title I of ERISA. 

Title I of ERISA, among other things, prescribes standards for 
information that participants are entitled to receive, obligations for 
plan fiduciaries, and participants’ right to sue for breaches of 
fiduciary duty. Title I also prescribes minimum standards for 
participation, benefit accrual, vesting, and plan funding. These 
provisions concern who can participate and when they can participate, 
how long a participant must wait to begin accruing pension benefits,
how long a participant must wait before they have a right to benefits 
that cannot be taken away, and how much must be set aside each year to 
provide benefits when they are due. There are corresponding provisions 
in the Internal Revenue Code. Title IV established the Pension Benefit 
Guaranty Corporation and sets forth duties of this agency in providing 
insurance protection to defined benefit plan participants. 

The Employee Retirement Income Security Act’s title I standards 
generally apply to all private pension plans. However, there are 
certain pension plans that are not covered by Title I, such as pension 
plans sponsored by governmental agencies and churches. 

Q. Who is a plan fiduciary? 

[A plan fiduciary is a person who has discretionary control or authority
over the management or administration of the plan, including management
of plan assets.] 

A. The Employee Retirement Income Security Act defines a plan fiduciary 
as a person [Footnote 24] who (1) exercises any discretionary control 
or authority over management of the plan, (2) exercises any authority 
or control over the management of plan assets, (3) renders direct or 
indirect investment advice with respect to assets of the plan, or has
authority to do so, for a fee or other compensation, or (4) has any 
discretionary authority or responsibility in the administration of the 
plan. Also, ERISA requires that the plan have at least one named 
fiduciary. 

[Any person who makes investment decisions with respect to a qualified
plan's assets is generally a plan fiduciary. The duties a person 
performs for the plan, rather than his or her title, or office, 
determines whether that person is a plan fiduciary.] 

The employer and its officers and directors may be considered plan 
fiduciaries to the extent they act or serve in a capacity by performing 
functions that are covered in ERISA’s definition of a plan fiduciary. 
Plan fiduciaries generally include plan trustees, plan administrators,
investment managers, and members of a plan’s investment committee. 

Q. How do the fiduciary provisions of ERISA protect participants? 

[The Employee Retirement Income Security Act protects participants
from mismanagement and misuse of assets by requiring accountability
on the part of those who administer plans.] 

A. The Employee Retirement Income Security Act defines several core 
standards of conduct for plan fiduciaries. For example, ERISA 
stipulates that plan fiduciaries must perform their duties with respect 
to the plan solely in the interest of plan participants, run plans for 
the exclusive purpose of providing benefits to plan participants and 
their beneficiaries, act prudently [Footnote 25] and may pay only 
reasonable expenses of administering the plan. Fiduciaries must 
diversify the plan’s investments in order to minimize the risk of large 
losses. They must also follow the terms of plan documents to the extent 
the terms are consistent with the provisions of the Employee Retirement 
Income Security Act. Plan fiduciaries must avoid conflicts of interest 
whereby they or parties that manage or provide services to the plan 
could benefit from the fiduciary’s actions. ERISA specifically 
prohibits plan fiduciaries -- when acting on behalf of the plan -- from 
engaging in transactions that benefit parties related to the plan. Such 
parties include but are not limited to other fiduciaries, service 
providers, employee organizations, and plan sponsors. Fiduciaries who 
do not follow these principles of conduct may be personally liable for 
any losses to the plan, or for restoring any profits made through 
improper use of plan assets. 

A fiduciary who is responsible for control or management of plan assets
may appoint a qualified investment manager to manage all or part of the
plan’s assets. An investment manager who has been appointed by a plan 
fiduciary to manage the plan’s assets is a fiduciary with respect to 
the management, acquisition, or disposition of plan assets. As long as 
the plan permits the delegation of investment responsibility and the 
delegation of investment responsibility is prudent, the fiduciary is 
not liable for the actions or omissions of the investment manager. 

Q. What is a trust, and what requirements govern trusts? 

[A trust is a legal arrangement that holds title to the plan's assets. 
ERISA generally provides that one or more trustees must hold all assets 
of an employee benefit plan, such as a pension plan, in trust for the
exclusive benefit of participants and beneficiaries.] 

A. Contributions to a qualified plan and the plan’s assets must be held 
in trust. Plan assets in a qualified trust are generally immune from 
the claims of the plan sponsor’s creditors (including from an 
employer’s bankruptcy) because qualified plan assets must be used for 
the exclusive purpose of paying benefits to participants and their
beneficiaries. 

A trustee may be a bank, a broker-dealer, trust company, or group of 
individuals with exclusive authority and discretion to manage and 
control the assets of the plan. For example, a plan trustee invests 
contributions made to the plan, accumulates the earnings on those 
contributions, and pays benefits directly to participants or makes funds
available to the plan administrator to pay benefits. However, the plan 
may stipulate that the investment of plan assets is subject to the 
direction of a named fiduciary or is delegated to one or more 
investment managers. 

[The trustees of the plan hold the legal title to all plan assets 
whether they are responsible for the investment of plan assets or such 
responsibility has been delegated to a named fiduciary or an investment
manager.] 

A plan’s trust is established through a written agreement with the plan
sponsor; these written instruments set forth the duties and rights of 
plan trustees. Plan trustees must be named by the plan or appointed by 
a plan fiduciary. There are certain arrangements that are not subject 
to the Employee Retirement Income Security Act’s trust requirements, 
including plans that are not subject to ERISA’s participation, vesting, 
funding, and termination insurance provisions. There are also certain
types of assets, such as assets that consist of insurance contracts, 
that are not subject to the Employee Retirement Income Security Act’s 
trust requirements. 

Q. Who makes investment decisions regarding qualified pension plan
assets? 

[The Employee Retirement Income Security Act requires that plan 
sponsors specify who is responsible for the investment of plan assets in
their plan documents.] 

With defined benefit plans, the plan trustee or other designated 
fiduciary makes investment decisions, unless the authority to manage 
the investment of plan assets is delegated, under the plan’s 
provisions, to one or more investment managers. An investment manager 
must be either a person who is registered as an investment advisor 
under the Investment Advisors Act of 1940, a bank (as defined in that 
Act), or an insurance company with the power to manage, acquire, or 
dispose of any plan asset under the laws of more than one state. For 
defined contribution plans with individual accounts, the plan may allow 
participants to make investment decisions with respect to the balances 
in their accounts. For example, many 401(k) plans permit participants 
to make investment decisions regarding their elective contributions. 

Q. Are plan fiduciaries responsible for investment decisions made by
plan participants? 

[If the plan sponsor meets certain Employee Retirement Income Security 
Act requirements, plan fiduciaries are not responsible for investment 
decisions made by plan participants. Under ERISA, plan fiduciaries may 
be relieved of responsibility for the investment decisions of plan 
participants when they exercise control over the investment of assets 
in their individual accounts in accordance with applicable Department 
of Labor regulations. These regulations contain special fiduciary rules 
that apply to plans with "participant-directed" investments.] 

A. Special fiduciary rules contained in Department of Labor regulations
protect plan fiduciaries from liability for individuals’ investment 
decisions with respect to plans that provide participant-directed 
investments. These special fiduciary rules for plans with participant-
directed investments are set forth pursuant to section 404(c) of the
Employee Retirement Income Security Act. 

There are certain requirements that must be satisfied in order for these
special rules to apply to plans that provide for participant-directed 
investments. Among other requirements, plans must offer participants at 
least 3 investment options, information about and investment 
instructions with respect to each of the investment options, and allow 
participants to exercise independent control over their investments. 
The protection afforded by satisfying these rules applies only with 
respect to transactions where participants in fact exercise independent
control over the assets in their accounts. When a plan satisfies the
special requirements for participant-directed investments, the plan 
fiduciary receives limited liability from the results of decisions made 
by participants who exercise independent control over the investment of 
their account balances. 

For plans that permit investment in employer securities, the Department 
of Labor’s regulations prescribe additional fiduciary rules. Among other
things, there are specific requirements regarding the decisions that 
employees make with respect to buying, selling, and voting of shares of 
employer stock. These requirements are intended to ensure that 
participants’ decisions are made confidentially and free from employer 
influence. 

Plans are not required to meet the standards prescribed in the 
applicable regulations. However, failure to satisfy these special rules 
means that plan fiduciaries might be held liable for the breach of 
fiduciary duty regarding the investment decisions of participants. 
Regardless of whether the plan satisfies the requirements for 
participant-directed investments under 404(c), plan fiduciaries must 
satisfy the responsibilities that apply to fiduciary conduct as
prescribed by ERISA. For example, plan fiduciaries must exercise care 
and prudence in selecting and monitoring investment options available 
to participants under the plan and must ensure that the plan is 
administered in accordance with plan documents to the extent to they 
are consistent with the Employee Retirement Income Security Act. 

Q. What rules govern investment of plan assets in employer stock? 

[Generally, defined benefit and defined contribution plan assets may be 
invested in employer stock, but there are certain rules that plans must 
follow regarding the amount employer stock they may hold.] 

A. Both defined benefit and defined contribution plan assets may be
invested in employer stock. The Employee Retirement Income Security
Act permits plans to hold “qualifying employer securities.” Employer 
stock is one type of qualifying employer security. [Footnote 26] There 
are certain requirements that defined benefit plans must satisfy 
regarding the portion of employer stock that may be acquired and held 
by the plan in order for the stock to be deemed a qualifying employer 
security. The Internal Revenue Code also delineates the type of 
employer stock that may be held by an Employee Stock Ownership Plan. In 
addition to qualifying employer securities, plans may also hold 
qualifying employer real property. [Footnote 27] 

Although ERISA permits plans sponsors to invest plan assets in employer 
stock, there are different rules relating to the amount of plan assets 
that may be invested in employer stock for defined benefit and defined 
contribution plans. Under ERISA, defined benefit plans may not acquire 
any qualified employer security or real property if immediately after 
the acquisition, the aggregate fair market value of such assets exceeds 
10 percent of the fair market value of the plan’s total assets. 
However, defined contribution plans, including 401(k) plans, Employee 
Stock Ownership Plans, and other defined contribution plans with 
individual accounts, are generally exempt from this requirement. Plans 
that are not subject to the 10 percent limitation are referred to in
ERISA as eligible individual account plans. 

While the vast majority of 401(k) and other types of defined 
contribution plans are not subject to any restriction on the amount of 
employer stock that they may hold, there are limited circumstances 
under which the 10 percent limit on employer stock could apply to a 
401(k) plan. For example, if a plan sponsor requires participants to 
invest their elective contributions in employer stock, the portion of 
the plan’s assets that consists of employee contributions could be 
subject to the 10 percent restriction. However, there are exceptions
under which the 10 percent limitation would not apply to a 401(k) plan
that requires employees to invest their elective contributions in 
employer stock. Employee Stock Ownership Plans that are designated as 
401(k) plans are exempt entirely from this restriction. 

Defined contribution plans may require that some contributions to 
participant accounts be invested in employer stock. For example, 401(k) 
plans may provide matching contributions in the form of shares of 
employer stock. A defined contribution plan may also require 
participants to hold employer contributions that the plan sponsor 
requires to be invested in employer stock (e.g., employer matching 
contributions) -- without the opportunity to change investments -- 
until certain conditions are met. For employees who make elective 
contributions and have the option to invest in employer stock, there is 
no limit on the amount of elective contributions that they may choose
to invest in employer stock (in an eligible individual account plan). 

There are specific rules regarding the investment of plan assets in 
employer stock that apply to Employee Stock Ownership Plans. The 
Internal Revenue Code delineates the type of employer stock that may be 
held by such plans. Also, Employee Stock Ownership Plans are permitted 
to require that employee contributions be invested in the employer’s 
stock, and there is no limit on the amount of employee contributions
that the plan sponsor may require to be invested in employer stock 
except in cases where a limited diversification requirement applies for 
certain participants. 

[Employee Stock Ownership Plans are subject to a limited diversification
requirement. The Internal Revenue Code stipulates that Employee Stock 
Ownership Plans must allow a participant who is 55 years old and has 10 
years of participation to diversify a portion of his or her account. 
Additional diversification is allowed after 5 more years.] 

Q. Can employers provide investment education and investment advice to 
plan participants? 

[Employers who sponsor defined contribution plans that permit 
participants to direct the investment of their contributions may provide
both investment education and advice to plan participants.] 

A. With respect to investment education, plan sponsors may provide 
certain types of investment information and materials that are not 
considered to be investment advice. Plan sponsors who provide 
investment advice directly to plan participants are subject to fiduciary
liability. The Department of Labor (DOL) issued guidance [Footnote 28] 
that defines certain categories of investment information and education 
employers may provide to plan participants without such information 
being considered investment advice. This guidance defines four 
categories of investment education. The four categories are defined 
under “safe harbors,” which exempt employers who provide these types of 
investment education from fiduciary liability that plan sponsors are 
subject to when they provide investment advice. Each safe harbor 
stipulates certain conditions that employers must meet when they 
provide the types investment information and education defined by the 
DOL’s guidance. 

Plan sponsors may also provide investment advice to plan participants. 
Investment advice is information that is rendered on a regular basis 
and is directly related to the investment options under the plan or the 
appropriateness of one or more of these options for a plan participant. 
[Footnote 29] For example, a recommendation to invest in one of the
plan’s investment alternatives is considered investment advice that 
could subject the plan sponsor to fiduciary liability. Instead of 
providing investment advice to plan participants directly, a plan 
sponsor may arrange for an external, unaffiliated party, such as a
brokerage company, to provide investment advice. 

The selection of an unaffiliated party to provide investment advice is 
also a fiduciary act. These parties are considered investment advisors 
under the Employee Retirement Income Security Act. ERISA currently 
prohibits investment advisors from engaging in transactions with 
clients’ plans where they have a conflict of interest. For example, an 
investment advisor that provides investment options and/or plan 
administration services to the plan may not also provide advice to the
plan’s participants about these investment options without approval 
from the Department of Labor. 

Q. What kinds of information are plans required to report to the
federal government? 

[Plan sponsors must provide certain information to the Department of
Labor, Internal Revenue Service and Pension Guaranty Benefit Corporation
regarding the operation, terms, and funding of their plans.] 

A. The Employee Retirement Income Security Act requires plan 
administrators to report certain information to the Department of 
Labor, Pension Benefit Guaranty Corporation and Internal Revenue 
Service, the agencies that administer the federal pension laws. The 
Form 5500 Annual Return/Report is a three-agency form. The Department
of Labor, in conjunction with the Internal Revenue Service and Pension
Benefit Guaranty Corporation publishes the Form 5500 to be used by plan
administrators and employers in order to satisfy their annual reporting 
obligations under ERISA and the Internal Revenue Code. Plan 
administrators must also submit certain schedules, depending on the 
features of the plan that accompany the Form 5500. Filing requirements 
for these schedules differ for plans with 100 or more participants and 
plans with fewer than 100 participants. The Department of Labor can 
also request from plan administrators other documents describing the 
plan or modifications to the plan. 

The Internal Revenue Service also requires that plan administrators file
returns in certain instances. For example, plan administrators must file
certain forms that disclose changes to the plan that the sponsor wants 
to make. These changes include combining plans after a company merger 
or consolidation, or in some cases when terminating a plan. IRS also
requires plans to file forms that relate to reporting or paying 
additional taxes. 

Finally, the Pension Benefit Guaranty Corporation requires that plan 
administrators file forms that are used to report and pay their 
premiums to PBGC. 

Q. What kinds of information are employers required to disclose to plan 
participants? 

[Plan administrators are required by ERISA to disclose information about
plan benefits, participants' rights, material changes to the terms of 
the plan, and the plan's financial status to participants.] 

A. The Employee Retirement Income Security Act requires plan 
administrators to disclose to participants and beneficiaries a summary 
plan description, describing their rights, benefits, and 
responsibilities under the plan in understandable language. The Summary 
Plan Descriptions includes such information as: 

* name and type of plan; 

* plan’s requirements regarding eligibility; 

* description of benefits and when participants have a right to those
benefits; 

* statement detailing that the plan is maintained pursuant to a 
collective bargaining agreement with regard to the plan; 

* statement about whether the plan is covered by termination insurance
from the Pension Benefit Guaranty Corporation; 

* source of contributions to the plan and the methods used to calculate
the amount of contributions; 

* provisions governing termination of the plan; 

* procedures regarding claims for benefits and remedies for disputing
denied claims, and; 

* statement of rights available to plan participants under ERISA. 

New employees must receive a copy of their plan sponsor’s latest Summary
Plan Description within 90 days after becoming covered by the plan. 
Plans sponsors are not required to file the Summary Plan Description 
with the Department of Labor, although they are required to provide it 
to DOL upon request. 

In addition to the Summary Plan Description, plan participants are 
entitled to receive a Summary of Material Modifications. The Summary of 
Material Modifications discloses what constitutes a significant 
modification in the benefits that the plan provides or in the 
administration of the plan and must be written in a manner that the 
average participant can understand. Plan administrators must furnish 
participants with a Summary of Material Modifications within 210 days 
after the close of the plan year in which the modification was made and 
also when there is a change to the information that is required to be 
included in the Summary Plan Description. 

Participants and individuals receiving benefits from the plan must also 
receive a Summary Annual Report from their plan’s administrator each 
year. The Summary Annual Report summarizes the plan’s financial status 
based on information that the plan administrator provides to the 
Department of Labor on its annual Form 5500. This document must 
generally be provided no later than nine months after the close of the
plan year. 

Participants may request information about their plan from the plan’s 
administrator. This information includes an updated Summary Plan 
Description, the latest annual Form 5500, a statement of the 
participant’s accrued benefits to date, or other documents under which
the plan is established or operated. Upon the written request of a plan
participant or beneficiary, plan administrators must provide certain 
information, such as a statement of the participant’s accrued benefits 
to date. 

Q. What is the difference between a plan freeze and a plan blackout? 

[A plan freeze occurs when a plan sponsor amends its plan to cease 
participants' benefit accruals, while a blackout is when a defined
contribution plan sponsor temporarily suspends transactions involving 
participants' individual accounts.] 

A. A plan sponsor may amend its plan to cease all benefit accruals 
indefinitely in the future. When a plan sponsor does this, it is called 
a plan freeze. A plan sponsor may decide to freeze its plan when it can 
no longer afford the cost of the plan and termination is not a practical
option, when it wishes to make changes to the plan, or to merge the 
plan with a new plan that the sponsor decides to offer. When a plan is 
frozen, current employees who participate in the plan do not accrue any 
additional benefits after the effective date of the plan freeze, and 
employees hired after that date are prevented from participating in the 
frozen plan. [Footnote 30] A plan sponsor who freezes its plan is 
obligated to pay all vested accrued benefits that current and past 
participants are entitled to receive under the plan. 

Employers who sponsor defined contribution pension plans with individual
accounts sometimes suspend or restrict transactions in participants’ 
accounts for various reasons, such as when the plan sponsor changes 
administrators or when the plan must perform administrative tasks that 
require a temporary suspension of account activity. When a plan sponsor 
suspends, restricts, or limits -- for a period of three or more 
consecutive business days -- the ability of participants or 
beneficiaries (as otherwise available under the terms of the plan) to 
direct the investment of assets in their accounts, obtain loans, or 
obtain benefit distributions, these suspensions are called “blackouts.” 
In contrast to a plan freeze, a plan blackout does not discontinue 
participants’ benefit accruals. During a blackout, plan participants 
cannot make changes to the investment of their account balances, such 
as changing investment options, or execute other transactions. 
Generally, plan sponsors must provide a 30-day advance notice to 
participants prior to instituting a blackout. Among other things, the
advance notice must include the reasons for the blackout and a statement
that the participant or beneficiary should evaluate their investment 
choices in light of the impending blackout. Also, rules relating to 
fiduciary standards continue to apply to the operation of an employer-
sponsored pension plan during such periods. That is, when a plan 
sponsor suspends transactions, it must still act in the best 
interest of the plan participants. 

[End of section] 

Section 4: Internal Revenue Code Provisions on Plan Coverage and 
Benefits: 

Section IV describes relevant provisions of the Internal Revenue Code 
that govern how tax-qualified plans must cover and provide benefits to 
employees. This section discusses rules and requirements that prescribe 
minimum standards on participation and benefits that participants are 
entitled to receive. [Footnote 31] 

Q. What are the rules for employee eligibility and participation in
pension plans? 

[Plan sponsors may generally define the groups of employees that are
eligible to participate in the plan and when these groups may begin to
participate subject to certain requirements.] 

A. Generally, a plan sponsor may define the groups of employees that are
eligible to participate in the plan and the conditions that these 
eligible employees must meet to begin participating. [Footnote 32] 
Plans may exclude employees who do not work at least 1,000 hours in
a year (i.e., never complete one year of service) but may not exclude 
part-time employees. Plans may also exclude hourly employees or certain 
salaried employees within a specific job classification. However, 
eligible employees must be allowed to participate in the plan as of age 
21 and after completing one year of service, subject to certain 
exceptions. 

A plan participant is an individual that is specifically included under 
his or her employer’s plan. Active employees who are or may become 
eligible to accrue or receive benefits under the plan, as well as 
former employees with a right to benefits and retired employees who
receive benefits, are considered plan participants. 

Q. What rules govern employee coverage in pension plans? 

[Tax-qualified plans must satisfy coverage requirements that are
designed to ensure a minimum proportion of rank-and-file employees are 
covered by and are benefiting under the plan.] 

A. In order to be tax-qualified, plans must satisfy certain coverage 
requirements under the Internal Revenue Code. These requirements are 
designed to ensure that a minimum portion of employees is covered by 
private plans, beyond those employees who are highly compensated, such 
as management or executives. Each coverage requirement applies a 
specific test to compare coverage among rank-and-file employees and 
highly compensated employees. Employers are generally permitted to 
exclude employees who have not satisfied certain minimum age and 
service requirements described previously. 

Figure 4: Coverage and Participation of Private Sector Employees: 

[See PDF for image] 

This figure is a multiple vertical bar graph depicting coverage and 
participation of private sector employees. The vertical axis of the 
graph represents percentage of all full-time, non-agricultural 
employees aged 25 to 64 from 0 to 100. The horizontal axis of the graph 
represents years from 1991 through 2000. For each year, two vertical 
bars are depicted: (1) percent of private sector employees who work for 
a plan sponsor; and (2) percent of private sector employees who 
participate in a plan. 

Source: Pension Sponsorship and Participation: Summary of Recent Trends 
(table 3),Congressional Research Service, Oct. 4, 2001. 

[End of figure] 

Q. What are the nondiscrimination rules that private plans must 
satisfy? 

[Nondiscrimination rules provide that private employers who sponsor tax-
qualified plans must meet certain requirements regarding how benefits 
or contributions are distributed between rank-and-file employees and 
highly compensated employees, such as company executives and owners.] 

A. These rules are intended to ensure that company executives and owners
do not receive too large a share of the plans contributions and 
benefits in relation to the portion received by rank-and-file 
employees. This is known as the general nondiscrimination requirement. 

[The general nondiscrimination requirement applies to all benefits, 
rights, and features of the plan.] 

If an employer sponsors a 401(k) plan or a qualified defined 
contribution plan that provides matching contributions or allows after-
tax employee contributions, the plan must satisfy special 
nondiscrimination rules. Plans that satisfy these special rules are also
treated as satisfying the general nondiscrimination rule. 

There are standard plan designs, termed “safe harbors,” which allow
employers to comply with nondiscrimination rules. Standard plan designs 
are available under the Internal Revenue Code for 401(k) plans and for 
certain qualified defined contribution plans that provide employer 
matching contributions or allow after-tax employee contributions. If a 
qualified defined contribution plan adopts a safe harbor design, then 
the plan is treated as satisfying both the special requirements to 
which the safe harbor applies and the general nondiscrimination rule on
contributions. If employers choose not to use safe harbor designs, they 
still have to meet the general nondiscrimination rule on contributions 
or benefits. To do this they must tailor their plan design to provide 
both coverage and contributions (or benefits) for rank-and-file 
employees at rates that do not differ too greatly from the rate at which
the employer provides coverage and contributions (or benefits) for 
highly compensated employees. 

In addition, simplified defined contribution pension plans are 
available to small employers. A private employer with 100 or fewer 
employees that does not already sponsor a pension plan may sponsor a 
Savings Incentive Match Plan for Employees (“SIMPLE”). [Footnote 33] A 
private employer with 25 or fewer employees that does not already 
sponsor a pension plan may sponsor a Simplified Employee Pension (SEP). 
These two types of plans provide relief from certain administrative or 
regulatory requirements in exchange for satisfying eligibility and 
mandatory employer contribution requirements that apply to these plans. 
For example, an employer who sponsors a Savings Incentive Match Plan 
for Employees and meets specific requirements regarding employee 
eligibility and mandatory employer contributions is relieved from 
satisfying certain nondiscrimination requirements that apply to 
qualified plans in general or qualified 401(k) plans. Simplified 
Employee Pensions are subject to minimum reporting and disclosure 
requirements (reporting and disclosure requirements are discussed in 
section III). 

Q. What are the “top heavy” rules and when do they apply to private
plans? 

[Top heavy rules, like the rules on nondiscrimination, address how
benefits and contributions are distributed, as well as when participants
have rights to their accrued benefits (vesting).] 

A. These rules identify pension plans in which owners and officers 
receive the majority of benefits or contributions, and require that 
workers (in these plans) receive higher minimum benefits and faster 
vesting rights of these benefits than they would otherwise receive. A 
private plan is deemed top-heavy if it fails the top-heavy test; that 
is, the firm’s top employees receive more than 60 percent of its 
benefits or contributions. Plans that provide the required top-heavy 
minimum contributions or benefits, and vesting, do not have to apply 
the top-heavy test. 

Q. What does vesting mean? 

[A participant who is fully vested has earned a right to his or her 
accrued benefit that cannot be taken away.] 

A. Vesting means that a plan participant has earned a nonforfeitable 
right to an accrued benefit, or a right to a benefit that cannot be 
taken away. Participants may have to work for a certain period of time 
before they have a right to accrued benefits (or the portion of accrued 
benefits) based on their employer’s contributions. Once a participant 
is fully vested, he or she has the right to 100 percent of the benefit
that he or she has accrued to date, including benefits derived from both
employer and employee contributions. However, if a participant leaves 
his or her employer before vesting, all or a part of the participant’s 
accrued benefit based on the employer’s contribution may be forfeited. 
In the event that a plan terminates, participants become fully vested 
in their accrued benefits as of the termination date if the plan has 
sufficient assets to cover accrued benefits participants are entitled 
to receive. 

There are rules regarding the maximum amount of time an employee must
participate in order to be vested. Defined benefit and defined 
contribution plan participants who vest are entitled to the portion of 
their accrued benefits based on the employer’s contributions even if 
they leave the plan sponsor before retirement. Also, both defined 
benefit and defined contribution participants are vested in their
accrued benefits when they reach their plan’s normal retirement age. 

[Participants are always 100 percent, immediately vested in any pre-tax 
or after-tax contributions, such as elective deferrals to a 401(k) plan,
they make to a qualified defined benefit or defined contribution plan.
However, participants may have to complete a certain number of years
of service before vesting in their employer's contributions.] 

There are two basic schedules under the law that plan sponsors may 
satisfy to determine when participants have a right to their accrued 
benefits: 1) cliff vesting and 2) graded vesting. Cliff and graded 
schedules set forth the minimum years of service that must be counted 
for vesting. These vesting schedules apply to both defined benefit and 
defined contribution plans. 

In plans with cliff vesting, there is a specified point at which plan 
participants have a right to their benefits accrued to date and 
benefits accrued thereafter. Current law stipulates that full vesting 
must occur no later than after 5 years of participation under cliff 
vesting. 

Vesting can take longer under a graded schedule than under a cliff 
schedule. Under graded vesting, plan participants have a right to an 
increasing percentage of their total accrued benefit over time, but 
full vesting must occur no later than after 7 years of participation. 

For defined benefit plans and certain contributions to defined 
contribution plans, participants have a right to 20 percent of their 
accrued benefits after three years of service, 40 percent after four 
years of service, 60 percent after five years of service, 80 percent 
after six years of service, and a right to 100 percent after seven 
years of service. For defined benefit plans, participants under a cliff 
vesting schedule are fully vested after 5 years of service, while 
participants under a graded vesting schedule are fully vested after 7 
years of service. For defined contribution plans that provide matching 
contributions, participants under a cliff vesting schedule must be 
fully vested in their employer’s matching contributions after 3 years 
of service, while participants under a graded vesting schedule must
be fully vested after 6 years of service. As previously mentioned, “top-
heavy” plans must vest benefits faster than under general vesting 
requirements. 

Figure 5: Vesting Status of Participants in DB and DC Plans: 

[See PDF for image] 

This figure is a horizontal bar graph depicting the following data: 

Vesting status of participants in defined benefit plans: 
Fully vested active participants: 36%; 
Partially vested active participants: 2%; 
Nonvested active participants: 17%; 
Retired or separated participants receiving benefits: 22%; 
Separated participants with vested right to benefits: 23%. 

Vesting status of participants in defined contribution plans: 
Fully vested active participants: 61%; 
Partially vested active participants: 16%; 
Nonvested active participants: 10%; 
Retired or separated participants receiving benefits: 1%; 
Separated participants with vested right to benefits: 12%. 

Source: Private Pension Plan Bulletin: Abstract of 1998 Form 5500 
Annual Reports (table A2),U.S. Department of Labor, Pension and Welfare 
Benefits Administration. 

[End of figure] 

Q. To what extent can accrued benefits be reduced or eliminated? 

[Generally a participant's accrued benefit may not be reduced or
eliminated by amending the plan. The general prohibition on reducing
or eliminating accrued benefits is known as the anticutback rule.] 

A. The anticutback rule [Footnote 34] applies only to benefits that 
participants have accrued up to the date of the amendment. [Footnote 
35] However, plan sponsors are not prohibited from reducing the rate of
future benefit accruals. For example, this means that a defined benefit 
plan may be amended to reduce the accrual factor (that is combined with 
years of service and average salary) in its benefit formula from 1.5 
percent to 1.25 percent for determining accrued benefits for service 
after the plan amendment has been adopted. Alternatively, a defined 
contribution plan may be amended to reduce an employer’s contribution 
to participant accounts from 3 percent of salary to 2 percent of salary 
after the plan amendment has been adopted. These reductions must not 
apply to accrued benefits prior to the amendment or the plan will be in
violation of the anti-cutback rule. Generally, a plan may not be amended
to significantly reduce the future rate of benefit accruals unless the 
plan’s administrator provides a written notice to all participants at 
least 45 days before the effective date of the amendment. [Footnote 36] 
Additionally, if a plan offers participants benefit payment options, 
such as a subsidized early retirement benefit, an early retirement 
benefit, or a retirement-type subsidy, the plan sponsor cannot amend 
the plan to reduce the benefits that participants have accrued to date 
under these options. 

Q. What rules govern age discrimination in the provision of pension
benefits? 

[There are two types of age discrimination in the provision of pension 
benefits that are prohibited. Plan sponsors may not reduce or cease 
benefit accruals on the basis of age, and plan sponsors may not deny 
employees the opportunity to participate in plans on the basis of age.] 

A. The Employee Retirement Income Security Act, the Internal Revenue
Code, and the Age Discrimination in Employment Act (ADEA) all have 
provisions that make it unlawful for pension plans to reduce a 
participant’s benefit accrual rate on the basis of age. The Internal 
Revenue Code prohibits a defined benefit plan from ceasing accruals, or 
reducing the rate of benefit accruals because of the attainment of any 
age. [Footnote 37] For example, a defined benefit plan may not provide 
benefits based on a formula with a 1.5 percent accrual factor for 
employees under age 40 and an accrual factor less than 1.5 percent for 
employees age 40 or older. The Internal Revenue Code also prohibits 
defined contribution plans from ceasing allocations, or reducing the 
rate at which amounts are allocated, to a participant’s account because 
of the attainment of any age. Similar provisions are found in both 
ERISA and ADEA. [Footnote 38] 

A pension plan cannot discriminate on the basis of age with respect to 
participation in the plan. Accordingly, a plan sponsor may not exclude 
employees who have attained a specific age from participating in the 
plan. In general, pension plans are considered to be discriminatory on 
the basis of age if they require, as a condition of participation, that 
an employee complete a period of service with an employer beyond the 
basic requirement of the employee being 21 years of age or completing 
one year of service. 

[End of section] 

Section 5: Government Insurance Protection of Pension Benefits: 

Section V discusses the role of federal government insurance in 
protecting pension benefits. [Footnote 39] 

Q. Under what circumstances may a private employer terminate a
pension plan? 

[Private employers may voluntarily terminate their plans so long as they
meet certain conditions for plan termination.] 

A. An employer may voluntarily terminate its pension plan under certain
circumstances depending on the funded status of the plan. There are 
different requirements for defined benefit and defined contribution 
plan sponsors. 

An employer who wishes to terminate a defined benefit plan has to meet 
certain conditions under the Employee Retirement Income Security Act 
and procedures prescribed by the Pension Benefit Guaranty Corporation 
(PBGC) in order to do so. When a single-employer defined benefit plan 
is terminated in accordance with PBGC’s requirements for plan 
termination and with enough assets to pay all the liabilities of the 
plan, the termination is referred to as a standard termination. Before 
initiating a standard termination, a plan sponsor must also provide 60-
day advance notice to plan participants. Under a standard termination, 
the plan must pay all benefits accrued under the plan up to the date of 
plan termination owed to participants. To do so, the plan sponsor may 
purchase an annuity from an insurance company or pay accrued benefits
as lump sum amounts (if allowed under the terms of the plan). PBGC’s 
insurance protection ends once the plan sponsor has provided for the 
payment of benefits owed to participants. The Pension Benefit Guaranty 
Corporation maintains the right to stop the plan’s termination if it 
determines that the plan sponsor has not met these termination 
requirements. 

In some standard terminations, the plan has more than sufficient assets 
to cover all benefits that participants are entitled to receive as of 
the date of plan termination. In such cases, a plan sponsor will often 
distribute these excess assets to participants. Alternatively, surplus
assets can revert to the employer if such a reversion is allowed under 
the terms of the plan. [Footnote 40] If excess assets revert to the 
plan sponsor upon termination, the employer is responsible for
a 50 percent excise tax on the surplus assets, which are also subject 
to ordinary corporate income tax. Under certain circumstances, the 
excise tax can be reduced to 20 percent. 

If a single-employer defined benefit plan does not have enough assets 
to pay benefits due to participants, the plan can be voluntarily 
terminated only if the conditions for a distress termination are 
satisfied. Generally, the plan sponsor must prove to the Pension 
Benefit Guaranty Corporation, which will trustee and administer the 
plan, that its business is unable to financially support the plan. In 
particular, a distress termination of a single employer’s plan may
occur if the employer meets at least one of the following conditions: 

(1) liquidation in bankruptcy or insolvency proceedings; 

(2) reorganization in bankruptcy or insolvency proceedings; or; 

(3) termination in order to enable payment of debts while staying in 
business or to avoid unreasonably burdensome pension costs caused by a 
decline of the employer’s covered workforce. 

An employer wishing to voluntarily withdraw from a multiemployer plan
will generally only do so when it ceases to have an obligation to 
contribute to the plan or ceases operations covered by the plan. These 
events occur, for example, when a collective bargaining agreement is 
not extended or when an employer goes out of business. The employer may 
incur a withdrawal liability upon leaving the plan. Even if all 
sponsoring employers withdraw from a multiemployer plan, the plan
may continue to operate because the plan’s trustees are not required to 
close out (terminate) the plan as would be the case with the standard 
termination of a single-employer plan. 

PBGC becomes involved with a multiemployer plan when the plan becomes
insolvent and is unable to pay benefits when they are due. When 
insolvency occurs, PBGC will provide financial assistance to enable the 
plan to pay guaranteed benefits to its payees. 

In order to terminate a defined contribution plan, an employer 
generally must adopt a resolution terminating the plan, notify 
participants of the termination, and distribute plan assets as soon
as administratively feasible. Although the federal government does not 
insure defined contribution plans, a plan participant is entitled to 
his or her accrued benefit to date (account balance), including any 
employer contributions (to the extent funded), upon termination of the 
plan. [Footnote 41] 

Figure 6: PBGC Trusteeship of Terminated Defined Benefit Plans: 

[See PDF for image] 

This figure is a stacked vertical bar graph depicting PBGC Trusteeship 
of Terminated Defined Benefit Plans. The vertical axis of the graph 
represents number of DB plans from 0 to 14,000. The horizontal axis of 
the graph represents years from 1980 through 2000. For each year, there 
are two values depicted as follows: 

Year: 1980; 
Terminated DB plans not taken over by PBGC: approximately 4,000; 
Terminated DB plans taken over by PBGC: 104. 

Year: 1981; 
Terminated DB plans not taken over by PBGC: approximately 5,000; 
Terminated DB plans taken over by PBGC: 137. 

Year: 1982; 
Terminated DB plans not taken over by PBGC: approximately 6,000; 
Terminated DB plans taken over by PBGC: 131. 

Year: 1983; 
Terminated DB plans not taken over by PBGC: approximately 6,500; 
Terminated DB plans taken over by PBGC: 150. 

Year: 1984; 
Terminated DB plans not taken over by PBGC: approximately 7,700; 
Terminated DB plans taken over by PBGC: 99. 

Year: 1985; 
Terminated DB plans not taken over by PBGC: approximately 8,800; 
Terminated DB plans taken over by PBGC: 115. 

Year: 1986; 
Terminated DB plans not taken over by PBGC: approximately 6,800; 
Terminated DB plans taken over by PBGC: 132. 

Year: 1987; 
Terminated DB plans not taken over by PBGC: approximately 11,000; 
Terminated DB plans taken over by PBGC: 107; 

Year: 1988; 
Terminated DB plans not taken over by PBGC: approximately 11,000; 
Terminated DB plans taken over by PBGC: 99. 

Year: 1989; 
Terminated DB plans not taken over by PBGC: approximately 11,500; 
Terminated DB plans taken over by PBGC: 83; 

Year: 1990; 
Terminated DB plans not taken over by PBGC: approximately 12,000; 
Terminated DB plans taken over by PBGC: 101. 

Year: 1991; 
Terminated DB plans not taken over by PBGC: approximately 8,800; 
Terminated DB plans taken over by PBGC: 174. 

Year: 1992; 
Terminated DB plans not taken over by PBGC: approximately 7,000; 
Terminated DB plans taken over by PBGC: 156. 

Year: 1993; 
Terminated DB plans not taken over by PBGC: approximately 5,000; 
Terminated DB plans taken over by PBGC: 122; 

Year: 1994; 
Terminated DB plans not taken over by PBGC: approximately 4,000; 
Terminated DB plans taken over by PBGC: 135; 

Year: 1995; 
Terminated DB plans not taken over by PBGC: approximately 4,000; 
Terminated DB plans taken over by PBGC: 118. 

Year: 1996; 
Terminated DB plans not taken over by PBGC: approximately 4,000; 
Terminated DB plans taken over by PBGC: 87. 

Year: 1997; 
Terminated DB plans not taken over by PBGC: approximately 4,000; 
Terminated DB plans taken over by PBGC: 74. 

Year: 1998; 
Terminated DB plans not taken over by PBGC: approximately 3,000; 
Terminated DB plans taken over by PBGC: 58. 

Year: 1999; 
Terminated DB plans not taken over by PBGC: approximately 2,000; 
Terminated DB plans taken over by PBGC: 65. 

Year: 2000; 
Terminated DB plans not taken over by PBGC: approximately 2,000; 
Terminated DB plans taken over by PBGC: 31. 

Source: Pension Insurance Data Book 2000 (table S-10), Pension Benefit 
Guaranty Corporation. 

[End of figure] 

Q. Are participants’ benefits protected when their plan terminates? 

[Participants in most private sector defined benefit plans have 
insurance protection in the event of plan termination.] 

A. The federal government provides insurance protection up to certain
limits for benefits from most tax-qualified defined benefit plans. 
Insurance protection is provided for certain defined benefit plan 
participants in order to pay benefits these participants are entitled 
to receive in the event that a plan terminates with insufficient 
assets. 

A federal insurance program administered by the Pension Benefit Guaranty
Corporation provides protection up to certain limits for benefits from 
underfunded qualified defined benefit plans that are covered by PBGC 
insurance. The Pension Benefit Guaranty Corporation provides this 
protection under two programs -- the single-employer and the 
multiemployer programs. Under the first program, the insurance 
protection pays benefits in the event that a covered single-employer 
plan terminates with insufficient assets. Under the second program, 
financial assistance is provided to enable multiemployer plans to pay 
guaranteed benefits. 

Defined benefit plans that are subject to the Employee Retirement 
Income Security Act must satisfy certain minimum funding requirements. 
Also, the Employee Retirement Income Security Act requires plan 
sponsors to estimate their liabilities each year to determine whether 
their plans are fully funded or underfunded. An underfunded plan is a
plan with liabilities for current and future benefits that exceed the 
value of the plan’s assets (i.e., the plan would not have sufficient 
assets to pay the value of all present and future benefits). 

When a fully funded single-employer plan terminates in a standard 
termination, the benefits of participants are protected because the 
plan is required to either purchase annuities from a private sector 
insurance company or make lump sum distributions to participants that 
are no smaller than the present value of their accrued benefits. 

Defined contribution plans are, by definition, always fully funded 
because they make no promises regarding the level of benefits they will 
provide in retirement. The amount available to finance retirement from 
these accounts will equal the contributions made by the participant 
and/or the employer plus the net investment returns on the account. No 
government insurance exists for participants’ individual account 
balances in qualified defined contribution plans. 

Q. What is the role of the Pension Benefit Guaranty Corporation in
protecting retirement benefits? 

[The Pension Benefit Guaranty Corporation is a federally chartered
government corporation established by the Employee Retirement Income
Security Act of 1974 to insure the pension benefits of participants in
qualified defined benefit plans.] 

A. The Pension Benefit Guaranty Corporation was created to insure the
pension benefits of participants -- in certain private sector defined 
benefit plans – in the event that these plans terminate without 
sufficient assets to pay all present and future benefits owed. Pension 
Benefit Guaranty Corporation insurance covers both single-employer and 
multiemployer defined benefit plans. PBGC does not insure defined 
contribution plans, such as 401(k) plans, and does not provide coverage 
for defined benefit plans that are not subject to the Employee 
Retirement Income Security Act. In particular, the termination 
insurance program does not cover public sector plans. 

If a covered single-employer defined benefit plan terminates without 
sufficient assets, the Pension Benefit Guaranty Corporation takes over 
the plan’s assets and is responsible for paying benefits up to limits 
set by law to participants who are entitled to receive them. PBGC will 
take over an underfunded single-employer plan that has been terminated 
under two different scenarios: where the employer initiates a distress 
termination (voluntary) and where the PBGC initiates the termination
(involuntary). An employer in financial distress may voluntarily 
terminate an underfunded single-employer plan only if certain 
conditions are satisfied. These conditions demonstrate to PBGC that the 
employer business cannot financially support the funding of pension 
benefits. 

The Pension Benefit Guaranty Corporation may initiate the termination 
of a single-employer defined benefit plan when the plan does not have 
the assets needed to pay out benefits. [Footnote 42] For example, PBGC 
may terminate a plan when that plan has not met the Employee Retirement 
Income Security Act’s minimum funding standards or will not be able to 
pay benefits when they are due to participants. Also, PBGC must 
terminate a plan when it determines a plan is unable to pay benefits 
currently due to participants. PBGC may also terminate a single-employer
plan when the continuation of the plan would unreasonably increase the 
risk of a long-term loss to the agency’s insurance fund. 

The Pension Benefit Guaranty Corporation becomes involved with a 
multiemployer plan when the plan becomes financially insolvent and is 
unable to pay benefits owed to retirees and beneficiaries when they are 
due. However, unlike for underfunded single-employer defined benefit 
plans, PBGC does not trustee multiemployer plans that become insolvent. 
Rather, PBGC provides financial assistance to enable insolvent 
multiemployer plans to pay benefits owed to participants. 

Q. What are PBGC’s financial resources to carry out its mission? 

[The Pension Benefit Guaranty Corporation is financed through insurance 
premiums by PBGC-covered plans and the agency's financial assets.] 

A. The Pension Benefit Guaranty Corporation is financed through 
insurance premiums by employers that maintain insured plans, investment 
returns on PBGC’s assets, and assets acquired from terminated plans 
that PBGC takes over as trustee. There are certain risks, beyond PBGC’s 
control, that affect the agency’s long-term financial condition. These 
risks include downturns in the economy, failures of businesses with 
underfunded plans, a significant and long-lasting decline in the stock 
market, and a substantial and lasting drop in interest rates. These 
risks could increase plan underfunding by reducing the future returns 
on the assets of PBGC-insured plans and thus increase the value of PBGC-
covered pension plan liabilities. 

Currently, sponsors of single-employer defined benefit plans pay the 
Pension Benefit Guaranty Corporation a flat-rate premium of $19 per 
participant, per plan year. Unless they meet certain legal exemptions, 
under-funded single-employer plans pay a variable-rate premium, in 
addition to the basic, flat-rate premium, of $9 for every $1,000 (or
fraction thereof) of unfunded vested benefits. The premium rate for 
multiemployer defined benefit plans is $2.60 per participant, per plan 
year. 

Q. To what extent does the Pension Benefit Guaranty Corporation insure 
benefits provided by defined benefit plans? 

[The benefit that the Pension Benefit Guaranty Corporation pays depends
on certain factors including the provisions of the terminated plan and 
certain statutory limits that specify maximum benefit payments.] 

A. The pension benefit that the Pension Benefit Guaranty Corporation 
pays to a participant whose single-employer plan has been terminated 
depends on (1) plan provisions, (2) statutory limits on PBGC benefit 
payments, (3) the type of benefit the participant is entitled to 
receive, (4) the participant’s age, and (5) amounts of assets that PBGC
recovers from employers whose plans they have taken over. 

Pension Benefit Guaranty Corporation benefit payments are subject to a
maximum dollar limit. For single-employer plans, this limit is set each
year in accordance with the Employee Retirement Income Security Act. For
single-employer plans that PBGC takes over in 2002, the maximum insured
monthly amount is $3,579.55 ($42,954.60 per year) for a worker who 
retires at age 65. The maximum amount payable is lower if payments 
commence before age 65, and is higher if payments begin after age 65. 
The maximum amount payable is also lower if the insured benefit amount 
includes benefits for other beneficiaries, such as a survivor, in 
addition to the participant. 

The maximum amount payable for participants in PBGC-covered 
mutliemployer plans is determined by using a formula that does not 
change each year. The maximum amount, which depends on the 
participant’s years of service, is $12,870 per year for a participant 
with 30 years of service. 

The Pension Benefit Guaranty Corporation’s single-employer insurance
program has two additional limitations regarding the benefits that PBGC 
will pay to a participant whose plan has terminated. First, there is a 
limit on the level of supplemental benefits that PBGC will pay 
(supplemental benefits are often temporary benefits the participant
receives until he or she is eligible for Social Security benefits). 
Second, there is a five-year phase in period for the guarantee of 
benefit increases that were granted through plan amendments prior to 
the plan’s termination. 

Q. What plan benefits does PBGC guarantee? 

[The Pension Benefit Guaranty Corporation provides insurance protection 
for annuity benefit payments that defined benefit plans pay to 
participants at retirement and other forms of benefits that these plans 
may provide.] 

A. The Pension Benefit Guaranty Corporation guarantees four types of
benefits. These benefits include (1) benefits payable at the plan-
specified normal retirement age, (2) early retirement benefits, (3) 
disability benefits that plans may offer to participants who become 
disabled before plan termination, and (4) certain benefits for survivors
of plan participants. 

The Pension Benefit Guaranty Corporation typically pays benefits as a 
stream of monthly payments for life. However, PBGC may pay small 
benefits yearly rather than monthly. If the present value of future 
benefits is less than $5,000, the recipient may elect a lump sum 
instead of a stream of payments. 

[End of section] 

Glossary of Key Terms: 

This section contains definitions for key terms found throughout the 
publication. 

Accrued Benefit – For defined benefit plans, the accrued benefit is the 
amount that the plan participant will receive annually as a life 
annuity beginning at the plan’s normal retirement age, as determined by 
the plan benefit formula. For defined contribution plans, the accrued 
benefit is the balance of a participant’s individual account. This 
balance includes the sum of participant and/or employer contributions 
and investment returns (gains or losses), dividends, and capital gains 
(or losses) attributable to those contributions. 

Annuity – A series of periodic benefit payments (either annual or 
monthly) that begins at retirement and continues for a certain period 
of time or the participant’s lifetime. Annuities may continue through 
the lifetime of a participant’s surviving spouse. 

Blackout – A blackout occurs when a plan sponsor suspends, restricts, or
limits -- for a period of three or more consecutive business days -- 
the ability of participants or beneficiaries (as otherwise available 
under the terms of the plan) to direct the investment of assets in 
their accounts, obtain loans, or obtain benefit distributions. Although
the plan sponsor has suspended account transactions, participants 
continue to accrue benefits. Blackouts may be implemented for a number 
of reasons such as when a plan sponsor changes administrators or when a 
plan must perform administrative tasks that require a temporary 
suspension of account activity. 

Cash Balance Plan – A type of defined benefit plan that combines certain
features found in both defined benefit and defined contribution plans. 
Participants’ benefits are determined by a formula, like a defined 
benefit plan, but benefits are expressed as account balances, similar 
to a defined contribution plan. 

Defined Benefit Plan – A type of qualified plan where the plan sponsor
provides a guaranteed benefit generally expressed as monthly benefit 
based on a formula that generally combines salary and years of service 
to the company. Defined benefit plans express benefits as an annuity, 
but may offer departing participants the opportunity to receive lump 
sum distributions. 

Defined Contribution Plan – A type of qualified plan that establishes 
individual accounts for employees to which the employer, participants, 
or both make periodic contributions. Defined contribution plan benefits 
are based on employer and participant contributions to and investment 
returns (gains and losses) on the individual accounts. Participants may 
be able to direct the investment of the assets in their individual 
accounts. 

Elective Deferrals – Voluntary contributions that a defined 
contribution plan participant may elect to have made to his or her 
individual account. These contributions are made from the employee’s 
pretax income, and participants do not include these contributions as 
taxable income until they receive benefits. 

Employee Retirement Income Security Act of 1974 (ERISA) – The federal
law that sets minimum standards for pension plans sponsored by private
employers. These standards govern the management, operation, and 
funding of the plan. The Department of Labor’s Pension and Welfare 
Benefits Administration enforces these ERISA provisions. 

Employee Stock Ownership Plan (ESOP) – A defined contribution plan 
feature that requires the plan sponsor to invest plan assets primarily 
in shares of the employer’s stock. Through an Employee Stock Ownership 
Plan, the employer makes tax-favored contributions of company stock to 
individual participant accounts. 

Employer Matching Contributions – Employer contributions made to 
defined contribution plan participants’ accounts only if the 
participant makes elective contributions to the plan. Matching 
contributions are generally based on a specified percentage of the 
employee’s salary and the rate at which the participant contributes. 

401(k) Plan – A type of defined contribution plan feature (provided 
under section 401(k) of the Internal Revenue Code) that allows 
employees to reduce a portion of their current compensation for a 
contribution, on a pretax basis, to a qualified retirement account. 
Generally, participants may direct the investment of their account 
balances among a menu of investment options offered by their employer. 
Many sponsors match a portion of participants’ pretax contributions. 

Floor-offset Arrangement – Floor-offset arrangements are a type of 
hybrid plan that consists of two separate, but associated pension 
plans–a defined benefit “floor” plan and a defined contribution 
“offset” plan. Benefits provided by the defined benefit formula
represent the minimum level, or the “floor,” of total pension benefits 
that a plan participant is entitled to. The defined contribution plan 
(“offset” plan) establishes individual accounts for participants to 
which the employer and/or participant may make contributions. If the 
defined contribution plan provides a total benefit that equals or 
exceeds the benefit provided by the defined benefit floor plan, the 
participant receives (only) the accumulated balance in his or her 
defined contribution plan account. In the event that a participant’s 
defined contribution account balance is less than the benefit from the 
defined benefit plan, the defined benefit plan makes up the difference 
between the benefit it provides and the amount the participant has 
accumulated in the defined contribution plan. 

Hybrid Plan – A plan that contains features of both defined benefit and
defined contribution plans. For example, a hybrid plan may provide 
benefits based on a formula like a defined benefit plan, but pension 
benefits are expressed as an account balance like a defined contribution
plan. Cash-balance plans and floor-offset arrangements are hybrid 
plans. 

Individual Account – Defined contribution plan participants have 
individual accounts to which they and/or the employer may make periodic 
contributions. The benefits that participants receive are based on the 
contributions to and the investment returns on these accounts. 

Individual Retirement Account – A retirement arrangement authorized by
the Employee Retirement Income Security Act of 1974 and the Internal 
Revenue Code. Banks and other financial institutions may make Individual
Retirement Accounts (IRAs) available to workers. IRAs allow workers to
make tax-deductible and nondeductible contributions to an individual 
account. For workers who meet certain conditions regarding their income 
or who are not eligible to participate in their employer’s pension, 
contributions to an Individual Retirement Account receive favorable tax 
treatment; workers may take a current deduction on the contributions 
they make to their retirement accounts. Recently, another type of 
Individual Retirement Account, known as the ROTH IRA, that allows 
workers to make after-tax contributions and provides tax-free 
withdrawal of assets at retirement has been made available. 

Internal Revenue Code of 1986 (IRC) – Establishes requirements that 
private pension plans must satisfy, including minimum requirements on
coverage and benefits, in order to be qualified for tax-favored status.
Employers who sponsor tax-qualified plans are entitled to a current 
deduction (within limits) for the contributions they make to their 
plans. Also, contributions to a tax-qualified plan are not included in 
an employee’s income until he or she received benefits. The Internal 
Revenue Service enforces IRC requirements that apply to tax-qualified
plans. 

Joint and Survivor Annuity – A type of annuity payment option that 
provides an annuity benefit for the surviving spouse of a retired plan 
participant after the participant dies. In a defined benefit plan, the 
normal form of payment must provide a joint and survivor annuity to 
married participants. The benefit payment received by the surviving 
spouse must equal at least one half of the annuity benefit payment that 
the plan participant had received. 

Lump Sum Distribution – The payment of a participant’s accrued benefit 
as a one-time lump sum cash payment. Upon separation from the company, 
disability, or retirement a participant may be able to elect to receive 
his or her benefit in this form. Minimum Funding Requirements – Certain 
defined benefit and defined contribution plans subject to the Employee 
Retirement Income Security Act must satisfy minimum funding 
requirements that are intended ensure plan assets are sufficient to pay 
benefits when due to participants. 

Multiemployer Plan – A multiemployer plan is a collectively bargained
arrangement between a labor union and a group of employers in a 
particular trade or industry. Management and labor representatives must 
jointly govern these plans. 

Nondiscrimination Rules – Private employers that sponsor tax-qualified
plans must satisfy certain requirements regarding how benefits or 
contributions are distributed between rank-and-file employees and 
highly compensated employees such as company executives and owners. 
These rules are intended to ensure that highly compensated employees do 
not receive a disproportionate share of the plan’s benefits. There is a 
general nondiscrimination requirement that applies to all benefits, 
rights, and features of the plan. 

Nonqualified Pension Plan – An employer-sponsored pension plan that 
does not meet the applicable requirements for tax-qualification under 
the IRC. Employers do not receive a current deduction on contributions 
they make and employees do not receive a tax deferral on the 
contributions they make to nonqualified plans. Unlike qualified plans, 
nonqualified plans typically do not have to satisfy laws and 
regulations requiring a minimum level of benefits or contributions to 
the plan. 

Pension Benefit Guaranty Corporation (PBGC) – A federal corporation 
created by ERISA to insure the pension benefits of participants in 
qualified defined benefit pension plans. The Pension Benefit Guaranty 
Corporation takes over terminated defined benefit plans with 
insufficient assets to pay the benefits to which participants are 
entitled, and is responsible for paying those benefits up to certain
limits set by law. PBGC does not cover defined contribution plans. 

Plan Fiduciary – Defined by ERISA as any person who exercises 
discretionary control or authority over the management of a private 
pension plan and/or the plan’s assets, has the authority to render 
advice regarding plan assets in return for compensation, and/or has
discretionary authority or responsibility in the administration of the 
plan. The plan fiduciary is obligated to act prudently and exclusively 
in the interest of the plan participants and beneficiaries. Plan Freeze 
– A period in which a plan sponsor amends the retirement plan to stop 
all benefit accruals. When a plan is frozen, employees who participate 
in plan do not accrue any additional benefits after the effective date 
of the plan freeze, and new employees are prevented from participating 
in the frozen plan. This can be done in order to terminate the plan, 
transfer the plan to another employer, or to make other changes to the 
plan after participants’ currently accrued plan benefits have been 
paid. 

Plan Termination – An employer may terminate its plan so long as it 
meets certain requirements. In certain instances, a plan may not have 
sufficient assets to pay participants’ accrued benefits, and the 
Pension Benefit Guaranty Corporation may take over the plan. 

Qualified Pension Plan – An employer pension plan that receives 
preferential tax treatment in exchange for satisfying certain 
requirements established in the Internal Revenue Code of 1986 
(employers receive a current deduction on contributions they make to 
qualified plans within certain limits). Under current law, there are a
number of requirements that private pension plans must satisfy, 
including non-discrimination, benefit or contribution limitations, and 
minimum requirements on coverage and benefits, in order to be tax-
qualified. 

Roll-over – A direct transfer of pension benefits received as a lump sum
payment to another tax-qualified retirement plan or an Individual 
Retirement Account free of taxes. Employers who sponsor qualified plans 
and enable departing participants to receive benefits as lump-sum 
amounts must give participants the option to have these amounts “rolled-
over.” 

Trust – A legal arrangement distinct from the plan sponsor where the
contributions to the pension plan are deposited with a trustee. The 
trustees of the plan hold the title to all plan assets, whether they 
direct the investment of plan assets or the investment of plan assets 
is the responsibility of an appointed fiduciary or plan advisor. 

Vesting – Refers to when a plan participant has earned a right to a 
benefit that cannot be taken away (i.e., a nonforfeitable right to the 
participant’s accrued benefit). There are certain rules that private 
plan sponsors must follow regarding the length of time that participants
must work in order to be fully vested in their accrued benefits. 
Participants are 100 percent vested in any contributions they make to a 
qualified plan, but may have to work for a certain period of time 
before earning a right to their employer’s contributions. 

[End of section] 

Related GAO Products: 

Private Pensions: IRS Can Improve the Quality and Usefulness of 
Compliance Surveys. GAO-02-353. Washington, D.C.: April 12, 2002. 

Private Pensions: Improving Worker Coverage and Benefits. GAO-02-225.
Washington, D.C.: April 9, 2002. 

Pension and Welfare Benefits Administration: Opportunities Exist for
Improving Management of the Enforcement Program. GAO-02-232. 
Washington, D.C.: March 15, 2002. 

Private Pensions: Key Issues to Consider Following the Enron Collapse. 
GAO-02-480T. Washington, D.C.: February 27, 2002. 

Private Pensions: Issues of Coverage and Increasing Contribution Limits
for Defined Contribution Plans. GAO-01-846. Washington, D.C.: Sept. 17, 
2001. 

Retirement Savings: Opportunities to Improve DOL’s SAVER Act Campaign.
GAO-01-634. Washington, D.C.: June 26, 2001. 

Cash Balance Plans: Implications for Retirement Income. GAO/HEHS-00-207.
Washington, D.C.: Sept. 29, 2000. 

Private Pensions: Implications of Conversions to Cash Balance Plans.
GAO/HEHS-00-185. Washington, D.C.: Sept. 29, 2000. 

Private Pensions: “Top-Heavy” Rules for Owner-Dominated Plans. GAO/
HEHS-00-141. Washington, D.C.: Aug. 31, 2000. 

Pension Plans: Characteristics of Persons in the Labor Force Without
Pension Coverage. GAO/HEHS-00-131. Washington, D.C.: Aug. 22, 2000. 

Pension Benefit Guaranty Corporation: Financial Condition Improving,
but Long-Term Risks Remain. GAO/HEHS-99-5. Washington, D.C.: Oct. 16,
1998. 

401(k) Pension Plans: Loan Provisions Enhance Participation But May
Affect Income Security for Some. GAO/HEHS-98-5. Washington, D.C.: Oct. 
1, 1997. 

Retirement Income: Implications of Demographic Trends for Social 
Security and Pension Reform. GAO/HEHS-97-81. Washington, D.C.: July 11, 
1997. 

[End of section] 

Footnotes: 

[1] Pension contributions that fall within certain statutory limits, as 
well as investment earnings on pension assets, are not taxed until 
benefits are paid to participants. See section I of this primer for 
more information on tax-favored treatment for qualified plans. 

[2] Joint Committee on Taxation, Estimates of Federal Tax Expenditures 
for Fiscal Years 2002-2006, JCS-1-02 (Washington, D.C.: January 2002). 

[3] The determination that a plan sponsor makes to sponsor a plan is 
termed a “settlor” function. Other settlor functions that an employer 
performs include the decision regarding the type of plan to offer, the 
decision regarding level of benefits to provide under the plan and the 
decision to terminate the plan. Settlor functions do not subject the
employer or its executives to fiduciary responsibility under the 
Employee Retirement Income Security Act. Plan fiduciaries and their 
responsibilities are discussed in section III. 

[4] Public sector employers may choose to offer a pension plan to 
attract and retain a workforce in a competitive market and to enable 
workers to take advantages of the tax preferences associated with 
pensions. 

[5] A plan sponsor may include an employer, employee organization, or 
both. 

[6] Both the American Bar Association and the Teachers Insurance 
Annuity Association and College Retirement Equities Fund sponsor a 
multiple-employer plan. 

[7] Favorable tax treatment for employer-sponsored pensions was first 
provided in the Revenue Act of 1926. 

[8] The Employee Retirement Income Security Act does not govern 
governmental, church, and excess benefit plans among certain other 
plans excluded from coverage. ERISA also prescribes standards for 
welfare benefit plans which employers may voluntarily establish to 
provide health benefits, disability benefits, death benefits, prepaid 
legal services, vacation benefits, childcare, scholarship funds, 
apprenticeship and training benefits, or other similar benefits
to their employees. 

[9] Certain non-qualified plans are subject to title I of ERISA. 

[10] Under Reorganization Plan Number 4 of 1978, the Internal Revenue 
Service principally administers provisions relating to these functions. 
The Department of Labor principally administers provisions relating to
reporting and disclosure and fiduciary responsibility. 

[11] For information on various types of private plans and other topics 
of interest regarding the benefits that plans provide, go to 
[hyperlink, http://www.dol.gov/pwba/faqs/faq_consumer_pension.html]. 

[12] Qualified defined benefit plan benefit formulas must provide 
benefits in a way that satisfies accrual methods specified in the 
Internal Revenue Code. These rules are intended ensure that benefit 
accruals are not excessive for older participants or participants with 
many years of service in relation to younger participants or 
participants with fewer years of service. 

[13] Unlike traditional defined benefit plans, cash balance plans are a 
type of “hybrid” defined benefit plan that express accrued benefits as 
hypothetical account balances, and benefits accrue annually based on a 
set percentage of salary and interest earnings (see below in this 
section). 

[14] 26 U.S.C. 411(a)(7) and 411(c)(3). Defined benefit plans must 
express an employee’s accrued benefit as an annual benefit beginning at 
normal retirement age or the actuarial equivalent to a deferred 
annuity. The actuarial equivalent to a participant’s annual retirement 
benefit is determined by using a set of mortality factors and a 
discount rate specified under law. 

[15] Rules regarding when participants must receive benefit payments 
are referred to as minimum distribution rules. Other rules define 
certain distribution events, or circumstances under which plans may pay 
benefits to participants. 

[16] Defined benefit (DB) plans may offer early retirement benefits to 
employees who meet certain age and/or service requirements. Early 
retirement benefits may be subsidized or unsubsidized. Unsubsidized 
early retirement benefits are adjusted fully to reflect that the plan 
participant begins receiving these benefits before normal retirement 
age. The benefit adjustment lowers the benefit amount that the 
participant receives when he or she retires before the plan's normal 
retirement age to take into account the earlier receipt of benefits and 
the longer period over which benefits will be paid. Subsidized early 
retirement benefits, however, are adjusted with a discount that is 
favorable to the participant or with no discount to make the value of 
the early retirement benefit worth more to the participant than the 
benefit he or she would receive at normal retirement. DB plans are not 
required to offer either form of early retirement benefit, but if a DB 
plan does, participants typically must satisfy certain age and/or 
service requirements specified by the plan. 

[17] Defined benefit plans are also required to offer an annuity 
benefit to surviving spouses of plan participants who are vested and 
die before they begin receiving benefits. These benefits are called pre-
retirement survivor annuities. Pre-retirement survivor annuities are 
available to married participants from the time they become vested in 
their accrued benefits. 

[18] Pending Department of Labor issuance of applicable regulations. 

[19] A collectively bargained plan that has been established under the 
Taft-Hartley Act must be jointly trusteed - management and union 
representatives are equally represented among the plan’s trustees. 

[20] Terms such as the rate of benefit accruals, employer contribution 
amounts, and the period in which the contract is in effect are 
typically negotiated within the bargaining process. Thus, control over 
the time period in which changes can be made, and the design and 
benefits provided by the pension plan are often shared with the union. 

[21] 26 U.S.C. 402(g). 

[22] 26 U.S.C. 414(j). 

[23]For more information on pension plan participants’ rights and the 
role of ERISA, go to [hyperlink, 
http://www.dol.gov/dol/topic/retirement/index.htm], and go to 
[hyperlink, http://www.dol.gov/pwba/pubs/youknow/knowtoc.htm] for a 
Department of Labor brochure on workers’ pension rights. 

[24] A fiduciary may also be a partnership, corporation, joint venture, 
or other organization as defined under the Employee Retirement Income 
Security Act. 

[25] 29 U.S.C. 404(a)(1)(A) and (B). ERISA’s prudence standard requires 
that each fiduciary of a plan act with “care, skill, prudence, and 
diligence under the circumstances then prevailing and act as a prudent 
person serving in a like capacity and familiar with such matters would 
in conducting an enterprise of like character and with like aims.” 

[26] Qualifying employer securities also include certain publicly 
traded partnership interests as defined in the Internal Revenue Code 
and marketable obligations such as a bond, debenture and note or 
certificate of indebtedness. 29 U.S.C. 407(d)(5). 

[27] 29 U.S.C. 407(d)(4). 

[28] The Department of Labor’s guidance describes four categories of 
investment education plan sponsors may provide to participants: (1) 
information about the plan, (2) general financial information, (3) 
information based on “asset allocation models,” and (4) “interactive 
investment materials.” This guidance is contained in DOL’s Interpretive 
Bulletin 96-1. According to the Department of Labor, these investment 
education categories merely represent examples of investment 
information and materials that if furnished to participants would not 
constitute the rendering of investment advice. 

[29] 29 C.F.R. 2510.3-21(c). 

[30] Defined contribution plan participants continue to accrue interest 
on their individual account balances even though the accounts may no 
longer receive contributions. 

[31] For more information on tax laws, regulations, and programs that 
apply to private pension plans, go to [hyperlink, http://www.irs.gov/] 
and select “retirement plans.” 

[32] A plan’s specific eligibility requirements are allowed if 
applicable Internal Revenue Code rules on coverage are satisfied. 

[33] There are two types of Savings Incentive Match Plan for Employees 
– a SIMPLE 401(k) plan and a SIMPLE IRA plan. 

[34] 26 U.S.C. 411(d)(6). 

[35] There are limited circumstances under which a plan may reduce or 
eliminate accrued benefits. For example, a plan sponsor may adopt an 
amendment that reduces or eliminates accrued benefits under certain
conditions, such as when a change in law affects the plan’s 
qualification status and a reduction in or elimination of accrued 
benefits is necessary to comply with the change. 

[36] 29 U.S.C. 204(h). 

[37] 26 U.S.C. 411(b)(1)(H). 

[38] Federal pension law does, however, permit a reduction in the rate 
of benefit accrual based on years of service even though such a 
reduction in practice is more likely to affect older participants than 
younger participants. For example, a defined benefit plan may provide 
that participants with up to 20 years of service receive benefits based 
on a 1.5 percent accrual factor and participants with 21 or more years 
of service receive benefits based on 1.2 percent accrual factor. 

[39] For more information about insurance protection for benefits from 
certain private plans, go to [hyperlink, 
http://www.pbgc.gov/about/pensioninfo.htm]. 

[40] A plan amendment allowing reversion of surplus assets to the plan 
sponsor must be adopted at least five years prior to plan termination. 

[41] In the event of plan termination, plan participants become fully 
vested in their accrued benefits. 

[42] For more information on the circumstances under which the Pension 
Benefit Guaranty Corporation may terminate a qualified defined benefit 
plan, see [hyperlink, http://www.pbgc.gov]. 

[End of section] 

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