Payment of Retirement BenefitsThis chapter outlines your rights to payment of your benefits. The following questions are addressed:
- When will your benefits be paid?
- In what form will your benefits be paid?
As described in the previous chapter, ERISA sets rules protecting your eligibility to participate, your accrual of benefits, and your becoming vested under your retirement plan. ERISA also provides a variety of rules concerning when, as a plan participant, you may or must be permitted to receive your benefits. This chapter describes the payment of your benefits.
When can you expect payment of your benefits?
ERISA provides specific rules governing when you may, or must, begin receiving your retirement benefits. First, ERISA sets the latest date by which the plan must permit you to begin receiving your benefit. Under this rule, payment must begin by the 60th day after the end of the plan year in which the latest of the following events occur:
- you reach age 65 or, if earlier, the normal retirement age specified by your plan;
- the end of the 10th year after you began participation in the plan ends; or
- you terminate your service with the employer.
Thus, for example, your plan must provide at a minimum that you will be entitled to begin to receive your benefit 60 days after the end of the year in which you reach age 65, if you began participation in the plan at least 10 years before that year.
Your plan may allow you to receive payment of your benefit earlier than required by the above rule (and many plans do, subject to rules described below). However, as long as the present value of your vested accrued benefit is greater than $5,000, the plan cannot force you to begin receiving your benefit before you reach the age that is generally considered normal retirement age (or age 62 if later).
If the present value of your vested accrued benefit under the plan is $5,000 or less, the plan may require you to receive your benefit when it first becomes distributable, such as when you terminate employment. In determining whether your vested accrued benefit is $5,000 or less, the portion of your benefit that comes from amounts rolled over from another plan is not counted.
When may your plan permit you to take payment?
ERISA provides rules governing the times at which a retirement plan may permit you to receive benefits. As these limitations on distribution events for payment vary depending on the type of plan, consult your summary plan description or plan document for the specific events or times that are the conditions under which you will be entitled to receive your benefits. After the event occurs that permits payment of your benefit, your plan may require some reasonable period of time during which to calculate your benefit and determine your payment schedule, or to value your account balance and to liquidate any investments in which your account is invested. The following are a few general rules about possible distribution events for which your plan may provide:
- If your plan is a defined benefit plan or a money purchase plan, it will set a normal retirement age, which is generally the time at which you will be eligible to begin receiving your vested accrued benefit. These types of plans may permit earlier payments, however, either by providing for early retirement benefits, for which the plan may set additional eligibility requirements, or by permitting benefits to be paid when you terminate employment, suffer a disability, or die.
- If your plan is a 401(k) plan, it may permit you to take some or all of your vested accrued benefit when you terminate employment, retire, die, become disabled, reach age 59, or if you suffer a hardship. If your plan is profit-sharing plan or a stock bonus plan, your plan may permit you to receive your vested accrued benefit after you terminate employment, become disabled, die, reach a specific age, or after a specific number of years have elapsed.
Your plans summary plan description should describe all of the rules applicable to any of the events that permit distributions.
When must you take payment?
ERISA also sets a date by which you must begin to receive your benefits, regardless of your wishes or the plans rules, if your plan is tax-qualified. This mandatory beginning date is generally April 1 of the calendar year following the calendar year in which you reach age 70 or retire*. ERISA provides rules for determining how much of your accrued benefit you must then receive each year.
In what form will your benefits be paid?
With some very important limits, your plan can dictate the forms in which you may receive your accrued benefit. The protections that ERISA provides about form of benefit payments vary (again) depending on whether you have a defined benefit plan, money purchase plan, or other kind of defined contribution plan. If you are covered under a defined benefit plan or a money purchase plan, your benefit must be available in the form of a life annuity, which means you will receive equal periodic payments (e.g., monthly, quarterly, etc.) for the rest of your life. If you are married, your benefit must be available in the form of a qualified joint and survivor annuity. (That form of benefit payment is described in the next chapter, concerning spousal rights to benefit payments).
If you are covered under a defined contribution plan that is not a money purchase plan, the plan may choose to pay your benefits in a single lump sum payment, or in any other form it chooses. If it offers a life annuity option, however, and you choose that option, you and your spouse (if any) will be protected by being offered a life annuity or a joint and survivor annuity that satisfies the requirements of ERISA.