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2. Earning Retirement Benefits

Once you have learned what type of retirement plan you or your spouse has, you need to find out
when you or your spouse started to participate in the plan and when benefits begun. Plan rules can
vary as long as they meet the requirements under Federal law. You need to check with the plan or
review the plan booklet (
Summary Plan Description) to learn plan’s rules and requirements. Your
plan may require you to work for the company for a period of time before you may participate in the
plan. In addition, there typically is a time frame for when you begin to accumulate benefits and earn
the right to them (sometimes referred to as “

When do you begin to accumulate benefits?
Once you begin to participate in a retirement plan, you need to understand how you accrue or earn
benefits. Your accrued benefit is the amount of retirement benefits that you have accumulated or that
have been allocated to you under the plan at any particular point in time.

Defined benefit plans often count your years of service in order to determine whether you have
earned a benefit and also to calculate how much you will receive in benefits at retirement. Employees
in the plan who work part-time, but who work 1,000 hours or more each year, must be credited with a
portion of the benefit in proportion to what they would have earned if they were employed full time. In
defined contribution plan, your benefit accrual is the amount of contributions and earnings that
have accumulated in your 401(k) or other retirement plan account, minus any fees charged to your
account by your plan.

Special rules for when you begin to accumulate benefits may apply to certain types of retirement
plans. For example, in a
Simplified Employee Pension Plan (SEP), all participants who earn at
least $450 a year from their employers are entitled to receive a contribution.

Can a plan reduce promised benefits?
Defined benefit plans may change the rate at which you earn future benefits but cannot reduce the
amount of benefits you have already accumulated. For example, a plan that accrues benefits at the
rate of $5 a month for years of service through 2006 may be amended to provide that for years of
service beginning in 2007 benefits will be credited at the rate of $4 per month. Plans that make a
significant reduction in the rate at which benefits accumulate must provide you with written notice
generally at least 15 days before the change goes into effect.

Also, in most situations, if a company terminates a defined benefit plan that does not have enough
funding to pay all of the promised benefits, the Pension Benefit Guaranty Corporation will pay plan
participants and beneficiaries some retirement benefits, but possibly less than the level of benefits

In a defined contribution plan, the employer may change the amount of employer contributions in the
future. Depending on the plan terms, the employer may also be able to stop making contributions for
a few years or indefinitely.

Finally, an employer may terminate a defined benefit or a defined contribution plan, but may not
reduce the benefit you have already accrued in the plan.

How soon do you have a right to your accumulated benefits?
You immediately vest in your own contributions and the earnings on them. This means you have
earned the right to these amounts without the risk of forfeiting them. But note – there are restrictions
on actually taking them out of the plan. See the discussion on the rules for distributions later in this

However, you do not necessarily have an immediate right to any contributions made by your
employer. Federal law provides a maximum number of years a company may require employees to
work to earn the vested right to all or some of these benefits. (
See vesting rules).

In a defined benefit plan, an employer can require that employees have 5 years of service in order to
become vested in the employer funded benefits. Employers also can choose a graduated vesting
schedule, which requires an employee to work 7 years in order to be 100 percent vested, but provides
at least 20 percent vesting after 3 years, 40 percent after 4 years, 60 percent after 5 years, and 80
percent after 6 years of service. The permitted vesting schedules for current defined benefit plans are
shown in Table 3 below. Plans may provide a different schedule as long as it is more generous than
these vesting schedules.

In a defined contribution plan such as a 401(k) plan, you are always 100 percent vested in your own
contributions to a plan, and in any subsequent earnings from your contributions. However, in most
defined contribution plans you may have to work several years before you are vested in the employer’
s matching contributions. (There are exceptions, such as the SIMPLE 401(k) and the Safe Harbor 401
(k), in which you are immediately vested in all required employer contributions.)

Currently, employers have a choice of 2 different vesting schedules for employer matching 401(k)
contributions, which are shown in Table 2. Your employer may use a schedule in which employees are
100 percent vested in employer contribution after 3 years of service, called cliff vesting. Under
graduated vesting, an employee must be at least 20 percent vested after 2 years, 40 percent after 3
years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years.

You may lose some of the employer-provided benefits you have earned if you leave your job before
you have worked long enough to be vested. However, once vested, you have the right to receive the
vested portion of your benefits even if you leave your job before retirement. But even though you
have the right to certain benefits, your defined contribution plan account value could decrease after
you leave your job as a result of investment performance. (
see Vesting Rules)

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