Retirement Savings Plan
Part 4: Payment Of Benefits
Once you understand what type of plan you have, how you earn benefits, and how
much your benefits will be, it is important to learn when and how you can
When can you begin to receive retirement benefits?
There are several points to keep in mind in determining when you can receive benefits:
Federal law provides guidelines, shown in Table 7 below, for when plans must start paying retirement benefits.
Plans can choose to start paying benefits sooner. The plan documents will state when you may begin receiving payments from your plan.
You must file a claim for benefits for your payments to begin. This takes some time for administrative reasons. (See Part 6).
Table 7: Requirements under federal law for payment of retirement benefits
Under Federal law, your plan must allow you to begin receiving benefits* the later of -
Reaching age 65 or the age your plan considers to be normal retirement age (if earlier)
10 years of service
Terminating your service with the employer
*For administrative reasons, benefits do not begin immediately after meeting these conditions. At a minimum, your plan must provide that you will start receiving benefits within 60 days after the end of the plan year in which you satisfy the conditions. Also, you need to file a claim under your plan’s procedures (See Part 6).
Under certain circumstances, your benefit payments may be suspended if you
continue to work beyond normal retirement age. The plan must notify you of the
suspension during the first calendar month or payroll period in which payments
are withheld. This information should also be included in the Summary Plan
Description. A plan also must advise you of its procedures for requesting an
advance determination of whether a particular type of reemployment would result
in a suspension of benefit payments. If you are a retiree and are considering
taking a job, you may wish to write to your plan administrator and ask if your
benefits would be suspended.
Table 7 shows the general requirements for when payments begin. Listed below are some permitted variations:
Although defined benefit plans and money purchase plans generally allow you
to receive benefits only when you reach the plan’s retirement age, some have
provisions for early retirement.
401k plans often allow you to receive your account balance when you leave
401k plans may allow for distributions while still employed if you have
reached age 59 or if you suffer a hardship.
Profit-sharing plans may permit you to receive your vested benefit after a
specific number of years or whenever you leave your job.
A phased retirement option allows employees at or near retirement age to
reduce their work hours to part time, receive benefits, and continue to earn
ESOPs do not have to pay out any
benefits until one year after the plan year in which you retire, or as many as
six years if you leave for reasons other than retirement, death, or disability.
You may owe current income taxes - and possibly tax penalties -- on your
distribution if you take money out before age 59, unless you transfer it to an
IRA or another tax-qualified retirement plan.
Taking all or a portion of your funds out of your account before retirement age will mean you have less in retirement benefits.
When is the latest you may begin to take payment of your benefits?
Federal law sets a mandatory date by which you must start receiving your retirement benefits, even if you would like to wait longer. This mandatory start date generally is set to begin on April 1 following the calendar year in which you turn 70 or, if later, when you retire. However, your plan may require you to begin receiving distributions even if you have not retired by age 70.
In what form will your benefits be paid?
If you are in a defined benefit or money purchase plan, the plan must offer you a benefit in the form of a life annuity, which means that you will receive equal, periodic payments, often as a monthly benefit, which will continue for the rest of your life. Defined benefit and money purchase plans may also offer other payment options, so check with the plan. If you are in a defined contribution plan (other than a money purchase
plan), the plan may pay your benefits in a single lump-sum payment as well as offer other options, including payments over a set period of time (such as 5 or 10 years) or an annuity with monthly lifetime payments.
If you are leaving your employer before retirement age, see Part 5.
Can a benefit continue for your spouse should you die first?
In a defined benefit or money purchase plan, unless you and your spouse choose otherwise, the form of payment will include a survivor’s benefit. This survivor’s benefit, called a qualified joint and survivor annuity (QJSA), will provide payments over your lifetime and your spouse’s lifetime. The benefit payment that your surviving spouse receives must be at least half of the benefit payment you received during your joint lives. If you choose not to receive the survivor’s benefit, both you and your spouse must receive a written explanation of the QJSA and, within certain time limits, you must make a written waiver and your spouse must sign a written consent to the alternative payment form without a survivor’s benefit. Your spouse’s signature must be witnessed by a notary or plan representative.
In most 401k plans and other defined contribution plans the plan is written so different protections apply for surviving spouses. In general, in most defined contribution plans if you should die before you receive your benefits, your surviving spouse will automatically receive them. If you wish to select a different beneficiary, your spouse must consent by signing a waiver, witnessed by a notary or plan representative.
If you were single when you enrolled in the plan and subsequently married, it is important that you notify your employer and/or plan administrator and change your status under the plan. If you do not have a spouse, it is important to name a beneficiary.
If you or your spouse left employment prior to January 1, 1985, different rules apply. For more information on these rules, contact the Department of Labor toll free at 1.866.444.EBSA (3272).
Can you borrow from your 401k plan account?
401k plans are permitted to - but not required to - offer loans to participants. The loans must charge a reasonable rate of interest and be adequately secured. The plan must include a procedure for applying for the loans and the plan’s policy for granting them. Loan amounts are limited to the lesser of 50% of your account balance or $50,000 and must be repaid within 5 years, or 15 years for residential loans.
Can you get a distribution from your plan if you are not yet 65 or your plan’s normal retirement age but are facing a significant financial hardship?
Again, defined contribution plans are permitted to - but not required to - provide distributions in case of hardship. Check your plan booklet to see if it does permit them and what circumstances are included as hardships.
Find out when and in what form you can receive your benefits at retirement.
Fill out the necessary forms to update information with your retirement plan.
Notify the retirement plan of any change of address or marital status.
Keep all documents for your records, including Summary Plan Descriptions, company memos, and individual benefit statements.
For tax information, look at Internal Revenue Service Publication 575 (Pension and Annuity Income) by visiting www.irs.gov and selecting “Publications .