ERISA rules, vesting, and PBGC protections
If you lose your job, your pension isn’t automatically gone. How much you keep depends on federal protections, your plan’s rules, and how long you’ve worked for your employer. If the company is in financial trouble or files for bankruptcy, additional protections may come into play.
What is ERISA, and how does it protect your pension?
The Employee Retirement Income Security Act (often referred to as ERISA) is a federal law that protects retirement benefits in most private-sector pension and retirement plans. Under ERISA:
• Your contributions (the money you personally put into the plan) and any investment earnings are always yours.
• Employer contributions (the money your employer adds) depend on your vesting status — the length of time you’ve been with the company.
Note that ERISA does not cover government or most church pension plans. Church plans may elect ERISA coverage, though most choose not to.
Vesting rules for employer contributions
Federal law sets minimum vesting requirements:
• Cliff vesting — You become 100% vested after no more than 3 years of service.
• Graded vesting — You gain ownership gradually: 20% after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years, and 100% after 6 years.
If you’re fully vested, you keep all employer contributions. If you’re partially vested, you keep only the vested percentage. (Note that defined benefit pensions often follow different federal minimums — 5-year cliff or 7-year graded vesting.)
What happens to my pension if my employer goes bankrupt?
If you have a traditional pension, also called a defined benefit plan, and your employer cannot pay your benefits, the Pension Benefit Guaranty Corporation may step in. The PBGC insures most private pensions and will pay benefits up to legal limits. Certain small professional service firms (e.g., some law/medical practices with fewer than 26 employees) may not be covered.
Remember, ERISA sets the rules for pension plans, but only defined benefit pensions are insured by PBGC — not 401(k)s or other defined contribution plans.
In 2025, the maximum guarantee for a 65-year-old retiree receiving a single-life annuity is $89,181/year. The actual guarantee depends on your retirement age and annuity type — for example, starting benefits earlier or choosing a joint-and-survivor annuity lowers the maximum.
Small balance cash-outs and rollovers
Some plans automatically cash out small vested balances — now up to $7,000 for distributions after December 31, 2023. If your balance is between $1,000 and $7,000, most plans must roll the amount into an IRA unless you choose another option; if it’s under $1,000, they may pay it to you in cash.
If you take a lump sum directly, you’ll generally owe income tax and possibly a 10% early-withdrawal penalty if you’re under age 59½. To avoid these, you can roll over the balance into an IRA or another qualified retirement plan.
How can I protect my pension benefits?
Employers can design their own pension and retirement plans within federal guidelines, so it’s essential to:
• Review your Summary Plan Description.
• Ask your HR or benefits department about your vesting schedule.
• Confirm your distribution options.
• Understand what changes could happen during a reorganization or bankruptcy.
Quick Facts: Pension Protection at a Glance
- Your contributions: Always 100% yours immediately.
- Vesting: Federal law limits how long it can take for employer contributions to become fully yours (generally 3–7 years, depending on plan type).
- PBGC guarantee (2025): Up to $89,181/year at age 65 for traditional pensions (single-life annuity).
- Small balance payouts: Plans may automatically distribute vested balances of $7,000 or less.
- Tax tip: Roll over lump sums to an IRA or another qualified plan to avoid taxes and penalties.
Bottom line: If you’re fired or your employer files for bankruptcy, your pension may still be protected — especially if you’re vested. Understanding ERISA rules, vesting schedules, and PBGC coverage can help you keep the retirement income you’ve earned.
