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Sometimes a company will lay off workers who are approaching their term of service when their pension benefits will vest. So, for example, let's say an employee's pension plan vests at 30 years of service and the company lays them off when they have 5 years left. Do they have an ERISA claim for illegal termination? What constitutes "close to vesting"?
(Note that I am talking about real pension plans here, defined benefit plans. Not 401k's and things like that.)
So, for example, let's say an employee's pension plan vests at 30 years of service and the company lays them off when they have 5 years left. Do they have an ERISA claim for illegal termination? What constitutes "close to vesting"?
The numbers in this question don't match the rules from the US Department of labor:
In a defined benefit plan,an employer can require that employees have 5 years of service in order to become 100 percent vested in the employer funded benefits (called cliff vesting). 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. Plans may provide a different schedule as long as it is more generous than these vesting schedules. (Unlike most defined benefit plans, in a cash balance plan, employees vest in employer contributions after 3 years.)
But even if they use the cliff vesting method and they fire you the day before the date you would qualify for the pension, it doesn't save them a ton of money.
Or, more often, it may calculate your benefit through a formula that includes factors such as your salary, your age, and the number of years you worked at the company. For example, your pension benefit might be equal to 1 percent of your average salary for the last 5 years of employment times your total years of service.
So lets say that they fire you just before you reach 5 years service, and they accumulate 2% for every year of service, by firing you they will not owe you 10% of today's salary when you reach retirement age. If you are making 40K a year in 2020 and are age 30, then they would be avoiding owing you $4,000 a year starting in 2055 when you are 65.
Those cliff vesting rules are in place to avoid the situation when you have worked for decade and the incentive to fire you would be great.
The bigger risk is that the employer doesn't fully fund the plan, and then when you reach retirement age, they can't afford all the payments they committed to.
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 (PBGC) will pay plan participants and beneficiaries some retirement benefits, but possibly less than the level of benefits promised. (For more information, see the PBGC's Websiteat pbgc.gov.)
This has been an issue for local government run plans, private companies, and even plans run by unions. Though government plans and union plans have a completely different set of rules.
I am unable to find the definition of "close to being vested", if you think the termination was wrong you will have to contact the department of labor for assistance.
