WHAT IS 'Benefit Offset'

Benefit offset is a reduction in the amount of benefit payments received by a participant in a retirement plan that may result when the participant owes money to the plan.

BREAKING DOWN 'Benefit Offset'

Benefit offset is intended to adjust the retirement benefits the plan participant receives, given the overdue contributions the participant should have paid in the past. Essentially, the overdue contributions owed by the participant are deducted from their retirement payments to ensure they are paid to the plan. This type of offset can also occur if the participant is receiving retirement benefits from sources other than the plan. The U.S. Social Security Act provides for the withholding of up to 10 percent of a plan participant's benefits to compensate for funds owed to the plan.

Retirement plan benefits

The type of benefits paid from a retirement plan is based on the distribution options available under the plan and elections made by participants and their beneficiaries.

Defined contribution plans: 401k, profit-sharing, and other defined-contribution plans generally pay retirement benefits in a lump sum or installments.

Defined-benefit plans: The normal method of distribution is an annuity paid over the employee’s life or the joint lives of the employee and their spouse unless they elect otherwise.

Lump-sum payment: A plan can make a lump-sum distribution of a participant’s or beneficiary’s entire accrued vested benefit without consent if the benefit is $5,000 or less. If the benefit is more than $5,000, a lump-sum distribution can only be made with the participant’s and spouse’s, if applicable, written consent.

Installment payments: These are made at regular intervals for a definite period such as five or 10 years, or in a specified amount, for example, $2,000 a month, to continue until the account is depleted.

Annuity payments: These are made from a defined benefit plan or under a contract purchased by a defined-contribution plan. Payments are made at regular intervals over a period of more than one year, depending on the type of annuity.

Spousal annuities: If the participant is married prior to the first day of the period for which benefits are paid as an annuity, a plan must pay benefits in the form of a qualified joint and survivor annuity, QJSA. If the participant dies before the spouse, the plan pays the spouse a life annuity. A participant may, with proper spousal consent, waive the QJSA and chose another payment option. For a married, vested participant who dies before the annuity starting date, the plan must pay a qualified pre-retirement survivor annuity, QPSA, to the surviving spouse. The participant may, with spousal consent, waive the QPSA and choose an alternate form of distribution provided under the terms of the plan. Unmarried participants must receive a single-life annuity, unless waived.

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