Chapter 13

Types of pension plans

Defined benefit or defined contribution plans.

PBGC: Pension Benefit Guaranty Corporation

Employers with defined benefit pension plans pay termination insurance, and these funds are used by the PBGC to provide at least partial retirement benefits to retirees and vested employees.

Consolidated Omnibus Budget Reconciliation Act (COBRA):

Requires that employers who have group health insurance plans and at least twenty employees offer continuation coverage to employees who experience qualifying events that would otherwise cause the loss of their health insurance. 18 months Voluntary or involuntary termination of employment for any reason other than "gross misconduct" Reduced hours of employment 36 months Divorce or Legal Separation Death of an employee Loss of dependent child under the terms of health plan Covered employee becoming entitled to Medicare

Patient Protection and Affordable Care Act (PPACA):

This law was put into effect in 2010, and intended to ensure most Americans will have adequate health insurance coverage. At the same time , the law includes a number of measures aimed at retaining in the cost of health care.

Fiduciary

anyone who exercises discretionary authority over the administration of benefit plan or its funds.

Pension plans

are designed to provide retirement income to employees or to otherwise defer income until after employment ends. Ex. defined benefit pensions, 401K, ESOPs, profit sharing.

Welfare plans

are essentially any other benefit plans covered by ERISA that are not pension plans. Ex. Health insurance, child care subsidies, and pre-paid legal services.

ERISA's anti-cutback rule

employers are prohibited from making changes to pension plans that reduce pension benefits already accrued by employees.

Grandfathered:

if they existed prior to the PPACA and no significant changes resulting in reduced benefits or increased cost to beneficiaries were made to the plan.

Defined contribution plans

include 401k, profit sharing plans, stock bonus plans, and employee stock ownership plans. In all of these plans, contributions are made into individual employee accounts. The pension benefit that employees receive is not specified beforehand but depends instead on the amounts in these individual employee accounts at the time of retirement. They make no promises regarding the eventual payout to employees.

Vesting

means that after a specified number of years of service, employees are covered under a pension plan acquire a nonforfeitable right to receive a pension.

Defined Benefit Plans

promise a specific pension benefit on retirement. The size of an individual's pension is typically determined by a formula based on years of service and earnings. An employer undertakes a long-term obligation to provide a specific level of retirement income to its employees. If the investments made by the pension fund do well, the employer has to contribute less. If the investments do poorly, the employer has to make up the difference. In either case, the pensions received by employees remain the same.

ERISA: Employee Retirement Income Security

the principal federal law regulating benefit plans. Does not cover government employer plans. Not only concerned with pensions.

Pension Protection Act of 2006

was to place defined benefit plans on firmer financial footing. (PPA) aimed to do this by, among other things, requiring that more realistic interest rate assumptions be used, increasing termination insurance premiums for companies with underfunded plans, further restricting the ability of underfunded plans to increase benefits, and requiring full funding of plans within 7 years.