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The Basics of Pension Plans Regulated by ERISA

The Basics of Defined Benefit PlansWhat are ERISA-regulated pension plans and welfare benefit plans?
What are the assets of pension funds in the United States?
How many people are covered by pension plans in the United States?
What are private trusteed plans and private insured plans? 

Q: What are ERISA-regulated pension plans and welfare benefit plans? 

A: The Employee Retirement Income Security Act of 1974 (ERISA) established standards of conduct for private plans.  ERISA does not mandate the kinds of benefit plans that employers implement or the level of benefits they provide; rather, it sets forth the rules that a sponsor must follow if it elects to provide benefit plans.

A pension plan, as defined by ERISA, is a program established or maintained by an employer that:

  • provides retirement income to employees, or
  • results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.

A welfare benefit plan, as defined by ERISA, is a program established or maintained by an employer that provides benefits other than retirement income.  Medical benefit plans are included in this category.  Although these benefits are not mandated by law, since 1993 Financial Accounting Standards (FAS) Rule 106 has required that employers who provide post-retirement medical benefits to employees must disclose the liability for the benefit and expense the associated future cost.

IRS rules allow for only limited tax-deferred funding for employee and retiree medical benefits.  Tax-exempt "VEBA" trusts are used by some employers for this purpose and also for the funding of long term disability benefits.

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Q:  What are the assets of pension funds in the United States? 

A:  As of the end of 1999, estimated private sector pension assets (single employer and multiemployer) totaled $6.2 trillion, and estimates of public sector assets (federal, state and local) were $3.7 trillion.

As of the end of 2000, CIEBA members held a total of $1.3 trillion in pension assets.

Q:  How many people are covered by pension plans in the United States? 

A:  Many organizations, both public and private, offer both defined benefit and defined contribution plans; therefore certain employees participate in both. In 1999, 22.5 million people participated in private sector defined benefit plans; 53.0 million in defined contribution plans offered in the private sector; 19.3 million in public sector defined benefit plans; and another 39 million in various types of other tax deferred retirement plans.

As of the end of 2000, 10.6 million people participated in defined benefit plans, and 6.1 million in defined contribution plans, sponsored by CIEBA members.

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Q:  What are private trusteed plans and private insured plans? 

A:  In a private trusteed plan, the plan sponsor executes a trust agreement with an independent trustee that provides for the receipt, investment, and disbursement of pension plan funds.  The trustee holds and accounts for the plan's assets for the benefit of the plan's participants and their beneficiaries.

In a private insured plan, the plan sponsor contracts with an insurance company to provide specified benefits to plan participants and their beneficiaries.  The plan sponsor makes payments to the insurance company to fund these benefits.  If the annuity is structured to assure that all risk and potential for future reward is transferred to the insurance company, it is possible that the liability reported in the employer's financial statements can be transferred to the insurance company as well.  The ultimate responsibility for taking all prudent steps required to assure payment of the contractual benefits remains with the employer, however.

 

bulletTable of Contents 

bulletPensions Liabilities and Funding 

bulletIntroduction 

bulletRegulation of Defined Benefit Plans 

bulletThe Basics of Defined Benefit
     Plans
 

bulletInvestment of Defined Benefit Plan Assets 

bulletTypes of Pension Plans 

 

 

 

 

 

 

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