A pension is a retirement arrangement under which an employer, or an employee organization such as a union, or both, promise income after working life ends. The statutory definition is much wider than that ordinary use, and it is written functionally, so an arrangement can be a pension plan without ever being called one.
The Statutory Definition Has Two Limbs, and Either One Is Enough
Except as provided in subparagraph (B), the terms employee pension benefit plan and pension plan mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program provides retirement income to employees, or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan (29 U.S.C. 1002(2)(A)).
Four features of that sentence decide most arguments about it.
The test is disjunctive. Providing retirement income is one route in and deferring income to termination of covered employment or beyond is another, so an arrangement that pays no retirement income at all can still be a pension plan on the second limb (29 U.S.C. 1002(2)(A)).
It reaches surrounding circumstances, not only the document. A plan, fund, or program qualifies by its express terms or as a result of surrounding circumstances (29 U.S.C. 1002(2)(A)), so an employer cannot write itself out of the definition by silence.
The phrase to the extent makes the characterization partial rather than all or nothing (29 U.S.C. 1002(2)(A)), which is the same device the section uses again when it splits a hybrid plan below.
And the method is expressly irrelevant. How contributions are calculated, how benefits are calculated and how benefits are distributed are all excluded from the question (29 U.S.C. 1002(2)(A)), which is why the definition covers arrangements that look nothing like a monthly check for life.
One sentence follows the definition to stop a particular argument. A distribution is not treated as made in a form other than retirement income, or as a distribution prior to termination of covered employment, solely because it is made to an employee who has attained age 62 and who is not separated from employment at the time of the distribution (29 U.S.C. 1002(2)(A)).
Defined Benefit and Defined Contribution Are Defined Against Each Other
The two familiar categories are not defined independently. One is defined positively and the other is defined as everything left over.
The term individual account plan, also called a defined contribution plan, means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to that participant’s account (29 U.S.C. 1002(34)).
The term defined benefit plan then means a pension plan other than an individual account plan (29 U.S.C. 1002(35)). The line between them is whether benefits rest on an individual account balance or on a promise measured some other way.
A hybrid gets split rather than forced into one box, and the split runs differently for different purposes. A pension plan which is not an individual account plan and which provides a benefit derived from employer contributions based partly on the balance of a participant’s separate account is treated as an individual account plan for the purposes of section 1052 of that title; and for the purposes of paragraph (23) of that section and section 1054 of that title, it is treated as an individual account plan to the extent benefits are based upon the participant’s separate account and as a defined benefit plan with respect to the remaining portion of benefits under the plan (29 U.S.C. 1002(35)). Two rules, not one, and the second is a partial characterization rather than a category.
Termination Insurance Follows That Same Line
The distinction is not academic, because the federal insurance program tracks it.
Except as provided in subsection (b), that subchapter applies to any plan, including a successor plan, which for a plan year meets either of two descriptions (29 U.S.C. 1321(a)).
The first reaches a plan that is an employee pension benefit plan, as defined in paragraph (2) of section 1002, established or maintained by an employer engaged in commerce or in any industry or activity affecting commerce, or by any employee organization or organization representing employees so engaged, or by both, which has, in practice, met the requirements of part I of subchapter D of chapter 1 of title 26, as in effect for the preceding 5 plan years of the plan, applicable to the plans described in that paragraph for the preceding 5 plan years (29 U.S.C. 1321(a)(1)). That trailing practice requirement is part of the description and is easy to read past.
The second reaches a plan that is, or has been determined by the Secretary of the Treasury to be, a plan described in section 401(a) of title 26, or which meets, or has been determined by the Secretary of the Treasury to meet, the requirements of section 404(a)(2) of title 26 (29 U.S.C. 1321(a)(2)).
The exclusions are written against the section rather than the subchapter, and the first of them is a plan which is an individual account plan, as defined in paragraph (34) of section 1002 (29 U.S.C. 1321(b)(1)). A defined contribution balance is therefore outside that coverage section, which is the practical reason the two categories are worth keeping apart on a client’s file.
Where a Pension Shows Up in the Books and on a Return
An employer’s promise under a defined benefit plan is measured actuarially rather than as a sum of expected payments, and the two standard measures of it, one with a future pay assumption and one without, are worked through in accumulated benefit obligation. When a participant’s right to a benefit stops being forfeitable is a separate question, held by vesting.
Whether the plan gets the tax treatment associated with the word is a third question again, decided by conditions the trust has to meet rather than by the plan’s shape, and it is set out in qualified retirement plans. On the recipient’s side, pension and annuity income is among the receipts treated as unearned income.
Common Questions
In statute, the difference is whether there is an individual account. A plan with an account for each participant, where benefits rest solely on what went into that account plus its investment results and allocations, is an individual account plan (29 U.S.C. 1002(34)), and a pension plan that is not one is a defined benefit plan (29 U.S.C. 1002(35)). Both are pension plans; only one carries an employer promise measured apart from an account balance.
Not every one, but the definition is broad and functional. An arrangement is inside it to the extent that by its express terms or as a result of surrounding circumstances it provides retirement income to employees, or results in a deferral of income to termination of covered employment or beyond (29 U.S.C. 1002(2)(A)). The name on the document decides nothing.
Federal plan termination insurance reaches only the plans the coverage section reaches, and that section expressly does not apply to a plan which is an individual account plan (29 U.S.C. 1321(b)(1)). Which plans it does reach runs off the two descriptions in the coverage section rather than off what the plan is called (29 U.S.C. 1321(a)).
For some purposes, yes, and the statute says so directly. A plan whose employer-derived benefit is based partly on a separate account balance is treated as an individual account plan to the extent benefits are based on that account, and as a defined benefit plan for the rest (29 U.S.C. 1002(35)).
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