To satisfy the general requirements, a qualified retirement plan must be permanent, meaning it cannot have a planned, definite expiration date. Although the employer may reserve the right to change or terminate the plan or to discontinue operations, abandoning the plan for other than business necessity within a few years is evidence that the plan was not a bona fide program from its inception. The plan must be a definite written program that is communicated to all employees. All plan assets must be held in trust by one or more trustees. The plan must be for the exclusive benefit of the employees and their beneficiaries. There can be no reversion of the trust's assets to the employer, other than forfeitures. And, the plan must be established and maintained by the employer. Funding can be provided through employer or employee contributions, or both.
Participation/coverage rules. To meet the minimum standards, at least a certain percentage of the non-highly-compensated employees must be covered by the plan and a certain number of those covered employees must actually be in the plan. The plan cannot discriminate in favor of employees who are officers, shareholders, or highly compensated, by making larger contributions on their behalf or providing them with better benefits. The plan may condition eligibility on age and service, but generally cannot postpone participation beyond the date the employee attains the age of 21 and the date on which the employee completes one year of service.
Vesting rules. The process of acquiring a nonforfeitable right to the money being set aside for you is called vesting, and means that you have to stick around in order to earn full benefits. There are two vesting methods: five-year cliff vesting in which the participant become fully vested after five years of service (with zero vesting in the first four years) and seven-year gradual vesting in which the participant becomes increasingly vested (usually 20 percent per year) after three years of service. Although the employer can have vesting rules more lenient than these, the rules cannot be more restrictive. An employee must become fully vested no later than the normal retirement age specified in the plan. The plan must also provide rules on how breaks in service affect vesting rights.
When an employee leaves your business, you may "cash out" the employee's pension benefits if the vested portion of the benefits is equal to or less than $5,000. Before 1998, the dollar threshold was $3,500 rather than $5,000.
Integration with Social Security. Many companies integrate their pension schemes with Social Security. This integration reduces your employer-provided pension benefit by a percentage of the amount of your social security benefit. The employer argues that since they must pay over 7 percent in social security taxes and also fund the pension program, without integration they are supporting two pension systems. However, although a certain degree of integration is allowed by law, an employee must be guaranteed at least 50 percent of the pension he or she earned when social security is merged with the pension.
Required communications. Each year the employer must furnish a document called a Summary Plan Description, written in plain English understandable to the average plan participant, detailing the amount of pension benefits, requirements for receiving those payments, and any conditions that might prevent someone from receiving them.
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