What are Withdrawal Credits, Pension Plan

Withdrawal credits, pension plan refers to the portion of an individual’s retirement assets in a qualified pension plan that the employee is entitled to withdraw when the employee leaves a job.

BREAKING DOWN Withdrawal Credits, Pension Plan

Withdrawal credits, pension plan describes the rights of an employee participant in a qualified pension plan to withdraw their portion of that plan plus some share of employer contributions upon their departure from that job. Under most pension plans, both the employer and employee make periodic contributions to a fund shared by all eligible employees. Each individual has an account within that fund, and multiple employers may participate in a single pension fund. When an eligible employee reaches retirement age, they are entitled to periodic distributions that generally equal a percentage of their income in pre-retirement years. An employee who leaves a firm prior to retirement age will likely be eligible for a partial distribution of their pension funds, depending on the vesting rules established by the employer and the plan.

The most common forms of pensions are the defined benefit plan, which entitles the retired employee a set cash distribution, and the defined contribution plan, in which contribution levels and investment performance determine distribution levels.

Withdrawal credits, pension plan prior to retirement

When an employee leaves a firm prior to retirement age, various factors determine the extent to which they are entitled to their pension balance. Most important among these is their vesting status. Vesting refers to the extent to which the employee has control over their retirement assets. In most cases, employees’ contributions vest immediately  and employees with longer tenures will be entitled to a greater share of employers’ contributions.

Because of the tax-exempt status of most retirement funds, departing employees should always roll these funds into a qualified individual retirement account (IRA) administered by a qualified financial institution. The IRS charges penalties on funds that are not placed in a tax-sheltered account. The IRS may consider some special cases such as death or disability in granting exceptions to these requirements. Other potential exceptions include some extreme medical expenses or corrections to a previous over-contribution.

For public sector pensions, withdrawal rules are determined on a state-by-state basis. Private pensions are subject to rules set out in the Employee Retirement Income Security Act of 1974 (ERISA). ERISA and subsequent tax rules lay out a complex system of rules regarding vesting and withdrawals from the numerous variations of defined benefit and contribution plans. Beyond the ERISA guidelines, employers have the discretion to structure their plans to their own needs. Departing employees should take great care to educate themselves about their options and obligations when making withdrawals from qualified retirement plans.