Pension plan participants sometimes call me about a dispute they are having with the plan administrator as to whether they are vested in their pension benefits. As part of their inquiry, they want to know the rules governing pension vesting. Here are the general rules, along with a real-life example of how they worked for a caller who, after 20 years of service with the same employer, was denied a pension on the ground that she was not vested.
In general, you are vested in your pension benefit [i.e., have an absolute right to receive it] once you satisfy the service requirements for vesting specified in the plan UNLESS a statute requires faster vesting. For private-sector pension plans governed by ERISA [the Employee Retirement Income Security Act], the minimum vesting rules differ for defined benefit (DB) pension plans and defined contribution (DC) pension plans (e.g., 401(k)).
For benefits derived from employer contributions, participants in ERISA-governed DB plans must be (i) 100% vested after 5 years of service, or (ii) 20% vested after 3 years of service, and an additional 20% vested for each year of service thereafter until the employee is 100% vested after 7 years of service. DB plans may provide for faster vesting, but most do not.
Participants in ERISA-governed DC plans, on the other hand, must be (i) 100% vested in their accrued pension benefit derived from employer contributions after 3 years of service, or (ii) 20% vested after 2 years of service, and an additional 20% vested for each year of service thereafter until the employee is 100% vested after 6 years of service. In addition, participants must be 100% vested in benefits derived from employer contributions when they reach "normal retirement age." Many DC plans provide for faster vesting of benefits derived from employer contributions.
Lastly, employees are always 100% vested in accrued pension benefits derived from their OWN contributions.
Disputes sometimes arise as to whether a participant has the requisite years of service to be vested. The genesis of the dispute often stems from whether the participant has sufficient hours of service to count as a year of service. Under ERISA, participants must be credited with a year of service once they have completed 1,000 hours of service in any 12-consecutive month period designated by the plan. Plans may, however, credit participants who have worked less than 1000 hours in a 12-month period with a year of service. Therefore, it is important to review the plan, as well as the participant's payroll records, to determine whether the participant's service has been properly credited.
REAL-LIFE EXAMPLE: A few years ago, I was contacted by a nurse who was a participant in a DB pension plan sponsored by a local hospital. The nurse told me she had worked for the hospital for 20 years, but was denied a pension on the ground that she never acquired enough service to become vested. Upon further inquiry, I learned that the nurse had worked part time the entire 20 years, averaging approximately 950 hours of service each year. Unfortunately for her, the plan required 1000 hours of service in a calendar year in order to be credited with a year of vesting service. Partial year vesting was not offered under the plan. Because the nurse never acquired a year of service under either the plan or ERISA, she never became vested in her pension. Stated otherwise, the plan administrator lawfully denied her request for a pension under the plan.
Pension vesting rules become much more complex where a participant separates from service before becoming vested, but later returns to work. If you have been denied a pension on "break-in-service" grounds (or any other lack of vesting grounds), it is best to consult an experienced pension lawyer to check things out and see whether you were given accurate information.
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