401k Plan 401k rules 401k Rules

Chapter 7: Dividing Benefit For Family Support

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Corporate and Institutional Investors

This chapter is about the rules that require employers to adequately fund their retirement plans.

What are the funding standards for plans?

ERISA sets minimum funding rules to provide that sufficient money is available to pay promised benefits to you when you retire. Funding rules establish the minimum amounts that employers must contribute to plans in an effort to ensure that plans have enough money to pay benefits when due. The rules are applicable primarily to defined benefit plans and also to money purchase plans.

Defined benefit plans generally fund future benefits over time. The plans consider probable investment gains and losses and make assumptions about factors such as future interest rates and potential workforce changes. ERISA provides detailed funding rules to protect the plan from financing methods that could prove inadequate to pay the promised benefits when they are due.

ERISA provides severe sanctions against an employer who fails to meet the funding obligations. Any employer who fails to comply with the minimum funding requirements is charged an excise tax on the amount of the accumulated funding deficiency, unless the employer receives a waiver of the minimum funding requirements. This tax is imposed whether the under funding was accidental or intentional. Certain actions can also be taken by the Department of Labor and the Pension Benefit Guaranty Corporation to enforce the minimum funding standards.

In the case of defined benefit plans that are less than 90 percent funded, you must be notified each year about the plans funding status and PBGCs guarantees.

Source: Department of Labor