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Simple English definitions for legal terms
Pension
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A quick definition of Pension:
When people retire from their jobs, they may continue to receive money from their employer in the form of a pension. There are two types of pensions: defined benefit plans and defined contribution plans. In a defined benefit plan, the amount of money an employee receives is based on their length of employment and wages earned. In a defined contribution plan, the employer puts money into an account for the employee, but the employee is not guaranteed a specific amount of money upon retirement. Pensions are governed by federal law, including the Employee Retirement Income Security Act (ERISA), which requires employers to provide detailed descriptions of pension benefits, establish fiduciary responsibilities, and adequately fund the program. ERISA also establishes the Pension Benefit Guaranty Corporation to insure defined benefit plans. Employers who follow ERISA guidelines may receive tax breaks.
A more thorough explanation:
A pension is a form of monetary compensation that an employee receives from their employer after retirement. There are two main types of pensions:
- Defined benefit plan: The benefit that an employee receives is based on the length of their employment and the wages they received. The money to support the pensions is administered through a trust established by the employer.
- Defined contribution plan: The employer makes regular deposits into an account established for each employee. The employee is not guaranteed to receive a given amount during retirement but only the amount in the account.
Pensions are governed primarily by federal statutory law. The Employee Retirement Income Security Act (ERISA) was passed by Congress to regulate interstate commerce and to prevent the mismanagement of funds in direct benefit plans. ERISA requires that employers provide both the Labor Department and its employees with detailed descriptions of the benefits they are to receive. It also outlines which employees must receive a pension if they are offered and requires that a percentage of the retirement benefits become vested in the employees after they have worked for a given number of years and/or have reached a given age. ERISA also requires that pension plans provide benefits to an employer's survivors upon their death.
For example, if an employee works for a company for 20 years and retires, they may receive a monthly pension payment based on their salary and length of service. The pension plan may also provide benefits to their spouse or children after their death.