New pension laws improve retirement benefits

Tax reform legislation and other recent changes in Federal laws have dramatically altered the rules that determine who will receive a pension and how much that pension will be. Workers and retirees covered by these new laws will find it easier to earn the right to a decent pension. Older Americans - and the organizations assisting them - need to be aware of these new rules when planning for job changes and retirement.

Three of the most important changes for workers covered by company and union pension plans took effect in 1989 either on January I or later at the beginning of the new plan year. For example, if a plan year runs from September I st to August 31 st, the new rules took effect on September 1, 1989. Persons in union-negotiated plans may not be affected by the new law until January 1, 1991.

First, new vesting rules allow most workers to earn the right to a pension in five years instead of ten. Once the worker vests" - that is, earns the right to a pension - she or he will not lose credit earned for years already worked and will receive a pension at retirement, even if he or she changes jobs. As an alternative to the five-year rule, plans may allow a small percentage of the pension to be earned in three years, with a larger benefit earned for each extra year worked until the full pension benefit is earned after the seventh year. An important exception to these new vesting rules is that workers covered by multi-employer plans" - where more than one company pays into the plan under a union contract - still must work 10 years to earn a right to a pension. Example: Margaret S. began her current job in 1982. Her plan year runs from October 1st to September 30th. If she had left her job in August 1989, she would have lost all credit for her years worked because she would not have met the old 10-year vesting requirement. However, if she had waited until October 1, 1989 to quit, the 5-year rule would have applied and she would have immediately earned a right to her full pension.

Second, "integration" of Social Security with pension benefits reducing the amount of the pension benefit by a like portion of the Social Security benefit that the retiree will receive - can no longer wipe out the entire pension benefit. Under the new law, retirees generally must be left with at least half of the pension benefit they have earned under the plan. However, this change only applies to benefits earned after the new law took effect during 1989. Example: When Herbert J. retires in 1999, he will be entitled to a monthly Social Security benefit of$500. The old integration" rule that applied to his plan until January 1, 1989 allowed his employer to take away the entire $400 pension he earned from his first 20 years of work by subtracting his Social Security benefit. However, the additional $200 in pension benefits that Herbert J. will earn when he retires 10 years from now cannot be cut by more than half under the new, rule, leaving him a 100 monthly pension benefit. Third, under new coverage rules, more workers will be included in pension plans, and thus, eligible to earn a right to benefits. The new law makes it more difficult for companies to exclude segments of the work force arbitrarily or to favor higher paid workers. There are several complicated new coverage rules. The simplest requires a company with a pension plan to include at least 70 percent of the company's employees in the plan. Example- Carl T. is one of four employees working in the warehouse of a 10-person shipping company. The company k pension plan excludes all warehouse employees. " As a result of the new coverage rules, the company will no longer be able to exclude the warehouse workers from the plan since the other six employees make up less than 70 percent of the work force.

Many older workers will benefit immediately from two other very important changes in the Federal pension laws that took effect in 1988 - if they worked at least one hour during a plan year that started on January 11 1988 or later. Unlike the three changes already mentioned, these two new rules also apply to state and local government pension plans.

Persons who start a new job at age 60 or later can no longer be denied plan membership and the chance to earn a pension - simply because of their age. They will, however, usually be required to work five years to earn the right to a pension. Example: After her divorce at age 63, Molly P. returned to the workforce. Under the new law, her company will no longer be able to exclude her from the company plan. Thus, she will earn the right to a pension if she stays at this job for five years.

Also, many workers will now receive pension credit for work after their 65th birthday. Most persons in plans that pay out fixed benefits - known as defined benefit plans" - will be helped a great deal by this new law since it applies to work performed since their 65th birthday. Persons in plans where employers put in a fixed amount of money - known as defined contribution plans" - were only able to start earning credits after the beginning of the 1988 plan year. However, this rule may not increase the size of the older worker's benefit if the plan calculates pensions based on a set number of years of service, such as 30 years, and the worker has been employed longer than that. Example: When Martin V. turned 65 in 1984, his employer stopped paying into the company's defined benefit plan for him. When the new plan year began on April 1, 1988, his plan was required by the new law to go back and count all his years of work in figuring his benefit. Right to Description of Plan

Federal law requires company and union pension plans to provide workers with certain plan documents. These documents can also be obtained by sending a written request to the person in charge of the plan. For most workers, the most important document is the Individual Benefit Statement that says whether the worker has earned a right to a pension, and how much that pension would be worth at retirement age if she or he stopped working on the date of the statement. Also valuable is the Summary Plan Description that explains plan rules in plain language. However, plans are only required to update the Summary Plan Description every five years. Therefore, they may not yet reflect recent changes in the law. Workers can also request the Plan Document that contains all the plan rules. Most plan documents will have to be changed by 1990 to incorporate the new pension laws. The plan must respond to a written request for information within 30 days.

For a list of publications about pensions, send a stamped self-addressed envelope to the Pension Rights Center, 918 16th Street, N.W., Washington, D.C. 20006. (202) 296-3776.

COPYRIGHT 1990 U.S. Government Printing Office
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