The US pension system is decentralised and generally falls under three pillars.

The first source of pension income for US workers who qualify are retirement benefits under the US Social Security system. The US Social Security system is funded by payroll taxes contributed by both employees and employers. US Social Security benefits are generally paid as annuities commencing at a designated retirement date and dependent on lifetime contributions, retirement age, timing of elections, disability and survivor status.

The second source of retirement income comes from voluntary employer-sponsored pension plans maintained by employers on behalf of their employees. These can be employer-funded in the form of a defined benefit pension plan or profit-sharing plan, or they can include employee contributions of wages on a tax-advantaged basis, such as a 401(k) plan. There are similar types of pension plans for government and non-profit workers.

The last source is individual retirement accounts (IRAs), which are tax-regulated accounts that can hold individual contributions and employer plan rollover amounts, and personal savings.

The primary legislation in the United States governing private employer-sponsored pension plans is the US Employee Retirement Income Security Act of 1974 (ERISA), which is a broad federal statutory scheme regulating pension plans which generally pre-empts state laws. The US Internal Revenue Code of 1986 (IRC) and/or state or local rules and regulations also govern pension plans sponsored by tax-exempt organisations and government employers.

ERISA governs pension plans through fiduciary governance and investment rules implemented through the US Department of Labor (DOL), tax-qualification rules under the IRC as promulgated by the Department of the Treasury, as well as an insurance guaranty programme for defined benefit pension plans administered by the Pension Benefit Guaranty Corporation (PBGC). The DOL, IRS and PBGC can enforce ERISA through audits, investigations and litigation, and participants and beneficiaries are afforded the right to make claims, appeals and commence litigation to enforce their rights. The three agencies adopt rules and regulations governing US pension plans and provide various types of interpretative guidance.

With respect to other areas of law, US pension plans generally pre-empt state laws targeted at pensions, but can be affected by US labour and securities laws, and anti-discrimination laws and other federal laws applicable to plan investments. Pension plans are a mandatory subject of collective bargaining under the US National Labor Relations Act (NLRA), and ERISA provides special rules for defined benefit pension plans for the unionised workforce.

Employers are not required to adopt and maintain a pension plan, apart from the few exceptions described below. There are also generally no mandatory participation requirements for specific categories of workers, sectors or professions.

The US Social Security system is mandatory by requiring employers to contribute to the system and withhold wages. There is a special system for railroad workers managed by the federal government that replaces Social Security benefits. With respect to government workers, federal workers are further automatically enrolled in the federal pension system, and state and local employers may be required to participate in a specific state-sponsored pension as a condition of their employment.

Private employers who do not voluntarily sponsor a pension plan for their workforce may be required to provide employees with access to a state-run IRA programme. Approximately half of US states have enacted or proposed legislation mandating that certain private employers transmit employee contributions to state-facilitated programmes if they do not offer a qualified retirement plan.

If an employer offers an employer-sponsored pension plan, there are required minimum participation requirements that mandate enrolment of active employees and requirements to provide a minimum level of benefits and vesting. Recent pension legislation has encouraged automatic enrolment into defined contribution plans that permit elective deferrals. For example, employers who adopted a new 401(k) plan after 29 December 2022 were required to adopt automatic enrolment provisions in 2025.

There are no compulsory private pension savings obligations for the self-employed.

As discussed under 1.2 Legislation, ERISA pension plan rules are generally implemented through three agencies, the DOL, IRS and PBGC. These agencies can enforce ERISA through audits, investigations and litigation, and participants and beneficiaries are afforded the right to make claims, appeals and commence litigation to enforce their rights.

The DOL

The DOL enforces the provisions of ERISA that relate to:

• fiduciary duties;
• prohibited transactions between plans and parties in interest;
• conflicts of interest;
• trust and administration requirements;
• required plan communications;
• annual reporting;
• filings under Forms 5500; and
• the protections of accrued benefits.

It administers self-correction programmes, including for delinquent Form 5500 filings, and voluntary fiduciary corrections for certain common errors.

The IRS

The IRS enforces the ERISA tax-qualification provisions, which are found under the IRC, and include various different and complex tax rules relating to:

• prohibited transactions;
• tax treatment of contributions and distributions;
• defined benefit plan funding;
• limits on pension contributions and deferrals;
• individual retirement accounts;
• pension plans of tax-exempt organisations and the self-employed; and
• other related requirements.

The IRS has certain correction procedures for common tax-qualification errors.

The PBGC

The PBGC enforces rules and regulations related to the operation of defined benefit pension plans and administers insurance benefits for insolvent defined benefit pension plans.

US employers, employees and their representatives, trustees and the three agencies enforcing ERISA, and the IRC are responsible parties that maintain and supervise pension plans. There are complex and overlapping statutory rules, regulations and guidance that are intended to protect the interests of participants and beneficiaries, preserve plan assets and avoid prohibited transactions and conflicts of interests with respect to the plan.

Under the NLRA, pension benefits are a mandatory subject of collective bargaining between employers and their unionised workforce. Collectively bargained pension plans must be governed by a joint board of trustees consisting of an equal number of employer representatives and union representatives. These plans may be single employer plans or multiemployer pension plans providing benefits to union employees of multiple participating employers. Multiemployer pension plans are funded by employer contributions agreed upon under collective bargaining agreements for similar industries and subject to special funding rules, withdrawal liability for departing employers and other insolvency rules enforced by the PBGC.

There are no other formal rights of consultation or co-determination in the United States.

The US pension plan system is undergoing continued legislative and regulatory reform. Recent legislation includes the SECURE Act and the SECURE Act 2.0, which include provisions intended to increase participation and expand flexibility and portability in administration and compliance for US pension plans. The statutes include expanded automatic enrolment opportunities for employees, increased catch-up contributions (including mandatory taxable treatment for catch-up contributions for high earners), expanded eligibility for long-term part-time employees, emergency savings accounts, student loan matching contribution programmes and changes to required minimum distributions for older pension plan participants who are required to take lifetime distributions on or after statutory ages (currently 73).

In addition, the federal government is reviewing US Social Security financing and benefit formulas, encouraging delays in commencement of the benefits. Commencing in 2027, the federal government will implement its Savers Match programme providing federal funds to match contributions of lower-income workers into retirement plans or IRAs. The match is 50% of deferrals up to USD2,000 (maximum of USD1,000) and there are lower amounts and a phase-out at certain income thresholds.

Pension plan fiduciaries may use plan assets to purchase insurance company products, such as group annuity contracts, guaranteed investment contracts, separate account products and other insurance arrangements. The pension plan remains responsible for the benefit obligation under ERISA fiduciary rules unless a paid-up annuity contract is distributed to a participant, as detailed under 2.2 Pension Funds. The treatment of the insurer’s underlying assets depends on the structure of the policy – principally whether the insurance contract is based on the insurer’s general account or a separate account.

A 401(k) plan as a defined contribution plan does not promise a specific benefit, but a 401(k) plan can be designed to make annuity distribution options available. Participants may allocate account balances to an insurance contract if offered under the 401(k) plan. The SECURE Act and the SECURE Act 2.0 provide a fiduciary safe harbour that permits 401(k) plan fiduciaries to select guaranteed retirement income contracts from an insurer and satisfy their fiduciary responsibilities. Plan fiduciaries are still responsible for evaluating the insurer, the insurance contract, administration and whether the insurance product is an appropriate investment alternative under the plan as a whole.

Annuity contracts must also be purchased from an insurer in the event a defined benefit pension plan is terminated under a PBGC standard termination, or if the plan fiduciary transfers pension risk for a subset of participants. The defined benefit pension plan must be fully funded for a standard termination, after which the assets are used to purchase a group annuity contract. Once the group annuity product is issued, the insurer assumes liability for covered individuals. The selection of the insurer is an ERISA fiduciary decision.

Pension plans are subject to strict fiduciary rules under ERISA. Plan assets must be held in trust and there must be a named fiduciary responsible for prudent investment decisions and administration of the pension plan assets. There are no lists of permissible or impermissible investments.

Under ERISA Section 404(a), plan fiduciaries are subject to the following duties and responsibilities: (1) they must act solely in the interests of participants and beneficiaries (loyalty); (2) for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan (exclusive purpose); (3) with the care, skill, prudence and diligence under the prevailing circumstances as a prudent person familiar with such matters (prudent expert); (4) diversify plan assets; and (5) follow the terms of the plan.

Under ERISA Section 406(a), fiduciaries may not cause the plan to engage in prohibited transactions with a party in interest, unless a specific exemption applies. Under IRC Section 4975, pension plans are subject to excise taxes and IRAs can lose their tax-exempt status if they engage in similar types of prohibited transactions. Fiduciaries are also not permitted under ERISA Section 406(b) to engage in transactions that would involve self-dealing, conflict of interest or receiving personal consideration. Plan fiduciaries who violate these rules can be subject to both ERISA fiduciary liability and excise taxes under the IRC.

Plan sponsors employ a number of service providers to help set up and provide record-keeping, custodial trust arrangements and investment advice for the plan. As hiring these service providers is a fiduciary decision, plan fiduciaries typically engage in a careful request-for-proposal (RFP) process in engaging the service providers. Plan fiduciaries must also engage actuaries to calculate required contributions to defined benefit plans, and legal counsel.

ERISA requires that pension plan assets be held in a trust (with the exception of fully insured plans and certain deferred compensation plans for a select group of management or highly compensated employees). Most pension plans are set up with a third-party trustee and custodian of the plan assets. Professional record-keepers offer plans pre-approved by the IRS and perform administrative functions.

Pension plans are required to follow the investment advice fiduciary rules and many employ service provider professionals to assist the fiduciary with performing its fiduciary duties. Pension plans may have investment advisers under ERISA 3(21) who are financial advice professionals who make recommendations but have no investment discretion, along with ERISA Section 3(38) investment managers who take full responsibility for the investment decisions. The pension plan fiduciary is responsible for hiring these advisers and for engaging in a prudent selection and review process.

Self-employed individuals have several options. They may adopt SIMPLE IRAs, solo or standard 401(k) plans, and simplified employee pensions (SEPs) that allow the self-employed individual to make contributions on their behalf from net earnings from self-employment. They may also adopt profit-sharing plans, money purchase plans and defined benefit pension plans, similar to those offerings available to private employers, subject to special definitions of earnings that differ from those for employees.

Regulated professionals do not have special pension plan rules, but rather adopt ERISA pension plans or, if self-employed, the types of pension plan arrangements described above.

As described under 2.3 Other Pension Providers, pension plan sponsors employ a number of service providers to help set up and provide record-keeping, custodial trust arrangements and investment services for the plan. The terms and conditions of service agreements can vary and there are no mandatory terms, except that an investment manager must acknowledge in writing that it is a fiduciary. Typically, there would be assignment of roles and clarification of the extent to which the service provider is acting (or not acting) as a pension plan fiduciary. The hiring fiduciary must review fees, service standards, whether there are any prohibited transactions between a plan and a service provider, as well as conflicts of interest, service standards, indemnification and cybersecurity protections, and address those in the engagement of the service provider.

As ERISA is a federal statute, disputes are typically resolved under federal law, rather than state contract rules. Interpretation by the courts include concepts of fiduciary responsibility and trust law principles.

Under ERISA, there is a fiduciary duty to follow the terms of the plan. Courts generally look at the plain meaning of the terms, the context of the plan document and amendments and applicable ERISA requirements.

ERISA Section 503 requires that pension plans have certain claims and appeals procedures, with deadlines and rules for the plan administrator to respond to claims for benefits. If the claim is denied, the plan administrator must provide notices and a reasonable opportunity to appeal. If the claims and appeals process is exhausted, then the claimant may sue under ERISA Section 502(a) seeking benefits due under the pension plan or other equitable relief.

The principal case on interpretation is the US Supreme Court’s decision in Firestone Tire & Rubber Co v Bruch, in which the Supreme Court held that a denial of benefits under ERISA is reviewed de novo unless the plan provides the administrator with fiduciary discretion to construe the terms of the plan. If there is discretionary language, courts apply an abuse of discretion or arbitrary and capricious standard, upholding the administrator’s interpretation if reasonable and supported by the record.

ERISA Section 101 further requires that plans provide a summary plan description (SPD), which outlines the plan terms in plain language and includes important plan information. These usually say that in the case of any conflict with the plan terms, the plan language controls.

The terms of the pension plan typically identify who has authority to amend the pension plan, and the processes and procedures for amending the pension plan must be followed. Some amendments are plan design decisions made by plan sponsors to reflect eligibility, vesting and funding, whereas other amendments are required to comply with applicable law. Legally required amendments will have an adoption deadline which may be later than a requirement’s effective date.

Under ERISA, accrued benefits may not be cut back by plan amendment or as a result of a plan merger. However, plan provisions may be changed prospectively, subject to any notice requirements.

There are required disclosure obligations to participants and notice requirements that include certain deadlines. These include ERISA Section 204(h) notices for amendments that cut back accrued benefits, 401(k) safe harbour notice requirements for changing safe harbour contributions, blackout period notices for times in which participants are restricted from making investment elections, and deadlines to communicate changes to plan terms under the SPD and summary of material modifications (SMM) timing requirements.

Claims and Appeals

As described above, ERISA Section 503 institutes claims and appeal procedures for making a claim for benefits under the pension plan. These requirements include timing and disclosure requirements for the claim, and appeals and guidelines for ensuring the claims and appeals procedures provide a full and fair review of the claim. The plan administrator or named fiduciary must review and make a decision with respect to a claim. There may be an appeal committee that reviews any appeals, which may or may not consist of the same individuals.

Lawsuits

In addition to the claims and appeals procedures, the claimant may sue under ERISA Section 502(a) in federal court. State courts may have concurrent jurisdiction, but as ERISA is a federal statute, ERISA claims are removable to federal courts. The claims procedures may refer to a statute of limitations for filing suit following adverse appeals. Lawsuits must generally be brought by the state law deadline applicable to similar claims, but plans may adopt shorter reasonable deadlines. Fiduciary breach claims under ERISA Section 413 commence the earlier of six years after the last action constituting the breach or three years after the plaintiff had actual knowledge of the breach or violation (with claims for fraud or concealment six years from discovery). Individuals may also bring claims for retaliation for exercising ERISA rights under ERISA Section 510 claims, which have statutes of limitations analogous to state law. Some courts have also upheld arbitration procedures in ERISA pension plans. Participant claims may be subject to arbitration, but courts have been unwilling to uphold mandatory arbitration of fiduciary breach claims.

Investigation by the DOL and IRS

The DOL and IRS also have authority to investigate claims. The DOL investigates and enforces the fiduciary, reporting and disclosure requirements through audits, investigations, reporting, and civil and criminal litigation. The IRS enforces tax-qualification issues, including prohibited transaction taxes through audits, investigations and the courts.

Tax qualified plans include defined contribution plans such as 401(k) plans where the benefit is measured by the participant’s account balance, and defined benefit plans where the benefit is fixed in the plan document. A popular type of defined benefit plan is the cash balance plan, in which benefits are expressed as a notional account balance. These may cover one employer’s employees (a single-employer plan), unrelated employers, or cover employees of different employers covered by the same collective bargaining agreement (multiemployer plans).

Qualified plans must be funded and, unless benefits are fully covered by insurance contracts, contributions must be held by a trustee in accordance with a trust agreement. Most tax qualified defined benefit plans are covered by PBGC insurance in the event the plan is terminated with insufficient assets. Non-qualified plans may be of either type and may pay benefits out of general corporate assets. If they are considered funded, non-qualified plan participants will be taxed when their benefits vest. Indexation of benefits is neither required by law nor common. In the event that defined benefit plan sponsors wish to adjust benefits to reflect increases in the cost of living, that is typically implemented by one-time amendments. There are no other formal risk-sharing mechanisms.

Plans subject to ERISA have a maximum normal retirement date set out in the statute at the later of age 65 or the fifth anniversary of plan participation, though plans may permit retirement at an earlier age and may require a combination of age and years of service for early retirement eligibility. Plans must give retirees the right to commence benefits no later than normal retirement age and fully vest them if they are not already 100% vested. There are rules against setting unreasonable early retirement ages that apply to certain defined benefit plans.

In a defined contribution plan, the participant’s benefit is the participant’s vested account balance. Defined contribution plans are not required to provide annuity benefits and many only provide for lump sum payments. Traditional defined benefit plans pay a normal retirement benefit based on a formula reflecting compensation and years of service, although collectively bargained plans may pay a flat dollar amount per year of service. Benefits may be actuarially reduced if pension payout commences prior to normal retirement age. Cash balance pension plans instead provide a benefit calculated by including pay credits and earnings credits. Although defined benefit plans are not required to offer lump sums, cash balance plans do. All defined benefit plans must offer life and joint and survivor annuities.

Plans are not legally required to provide orphans’ benefits and few do so. Surviving spouses have rights to benefits under tax qualified plans. A defined contribution plan participant must get a spouse’s notarised consent to designate anyone other than the spouse as account beneficiary if the plan does not pay out in annuity form. When benefits are provided in annuity form, such as in all defined benefit plans, the surviving spouse must receive a survivor annuity equal to at least 50% of the annuity payable during the participant’s lifetime unless the spouse waives the survivor benefit. Defined benefit plans must also provide a pre-retirement survivor annuity to surviving spouses of married participants. Defined contribution plans and cash balance plans typically provide lump sum benefits, but defined benefit plans are not required to provide lump sum benefits. Other forms of benefits are permitted subject to minimum distribution rules. These rules do not apply to non-qualified plans.

Employers have flexibility to determine the definition of disability that applies and some use the standard for Social Security disability benefits. Benefits may fully vest on disability. Disability may also be a special payment event, although defined benefit plans may suspend payments while the recipient is receiving long-term disability benefits. Plans also have the option to continue contributions for disabled participants, calculated as if their compensation continued at the rate received when last working.

Defined contribution plans may have discretionary benefits. Defined benefit plans are subject to mandatory funding requirements which amortise liabilities over a fixed period. Failure to make required minimum contributions subjects the sponsor to excise taxes, and a plan funding level below statutory minimums will restrict the plan’s ability to increase benefits and may restrict lump sum payments. Funding obligations are joint and several liabilities of the sponsor and related entities. The PBGC may obtain a lien on failure to make a required contribution of more than USD1 million. If a plan is overfunded at termination, the surplus may be applied to pay additional benefits or revert to the employer, subject to regular income tax and penalties. Surplus may also be applied towards retiree medical benefits. Multiemployer plans are subject to special rules that permit benefit reductions when the plan’s funding is below a certain level.

Maximum qualified plan benefits are subject to statutory cost-of-living increases, but benefits are not required to be indexed and post-retirement indexing is rare due to uncertain costs. Ad hoc cost-of-living adjustments are sometimes made in traditional defined benefit plans. Accrued benefits may not be retroactively reduced. However, if the plan terminates while underfunded and PBGC insurance coverage provides benefits, benefits might not exceed the maximum payable under the PBGC insurance programme. Underfunding in terminated plans is discussed in 4.6 Funding: Surplus and Deficit.

Qualified distributions on employment termination may be rolled over to an IRA or plan of a new employer without incurring current tax. Contributions are not permitted following termination of employment. Benefits must be preserved in plan-to-plan transfers such as spin-offs. 401(k) plans may permit limited in-service withdrawals and defined benefit plans generally may not provide for in-service withdrawals, except on or after age 59 years and six months. Small benefits (not exceeding USD7,000) may be directly transferred to a new employer if the sponsor voluntarily participates in a portability network.

PBGC insurance provides the basic safety net for covered defined benefit plans. Defined contribution plans are not insured. If the sponsor is in bankruptcy, PBGC will file claims for past due contributions and underfunding. PBGC liens can have the same status as federal tax liens. Assets of qualified pension plans are not available to creditors in bankruptcy. The plan may be terminated and benefits distributed to participants as part of the process. State guaranty funds provide a limited backup safety net if an insurer of distributed plan annuities were to become insolvent.

Pension plans will generally be inherited in a stock sale, but assuming them is optional in an asset sale. If the buyer already maintains its own plans, a spin-off or merger of seller plans into buyer plans may be considered. A sale to an unrelated buyer may create a distribution event for defined contribution plan participants. It has become common for buyers with their own 401(k) plans to ask sellers to terminate their 401(k) plans prior to closing in connection with an acquisition. This enables buyers to avoid penalties for non-compliance. If the seller employees participate in a multiemployer pension plan and the buyer in an asset sale does not assume contribution obligations, there will be a withdrawal from the plan and statutory withdrawal liability, which is a share of benefit underfunding, will be assessed against the seller. Diligence focuses on significant issues such as defined benefit plan funding levels, compliance of the plans in form and operation, and penalties that could be assessed for failure to file required annual reports (Form 5500) and other reporting and disclosure violations. These issues will also be covered in seller representations. Purchase price adjustments may be made to reflect liabilities inherited by the buyer. 

The United States has Social Security Totalization agreements and tax treaties with many countries. US citizens are taxed on the value of their pensions at receipt regardless of their country of residence. A special mandatory federal withholding rate of 30% applies to payments made outside the US to payees who are not US citizens or green card holders, unless a treaty applies a different rate. If a citizen of another country works for a period in the US, the pension will be apportioned and only the portion attributable to the period of residency will be subject to US tax. In general, payments may not be transferred on a tax-deferred basis to plans outside the US.

Federal non-discrimination laws apply to pension plans. These include Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the Equal Pay Act. In addition, qualified plans may not discriminate in favour of highly compensated employees in coverage, contributions, or benefits. This is established by application of mathematical tests, and a plan that fails to satisfy these tests can be disqualified if corrections are not made.

Unless plans are collectively bargained, there are no restrictions on an employer’s ability to freeze a plan to new entrants and to all new accruals. A defined benefit plan subject to PBGC insurance coverage may not be terminated without PBGC consent, unless it is fully funded. An underfunded plan may be terminated only if the sponsor and affiliated entities are in financial distress, and the PBGC may also involuntarily terminate a plan and assume responsibility for paying benefits. Benefits in underfunded terminations may be limited to the maximum amounts permitted under the PBGC insurance programme. The PBGC may obtain a limited statutory lien against the sponsor and affiliates to collect unfunded termination liability. Plan sponsors may annuitise benefits for groups of employees prior to termination by engaging in a pension risk transfer transaction to transfer obligations to a third-party insurer. In that case, the selection of the insurer is subject to fiduciary standards requiring selection of “the safest available annuity”. Pension risk transfers do not require participant consent but are the subject of ongoing litigation by participants who challenge the financial resources of selected insurers and their loss of PBGC insurance.

Occupational pension plans generally do not exist in the United States, with some minor exceptions described in 1.3 Voluntary or Compulsory Pension.

Mandatory participation in occupational pension plans generally does not exist in the United States, unless required by a collective bargaining agreement, with some minor exceptions described in 1.3 Voluntary or Compulsory Pension. Many defined contribution plans have automatic enrolment of participants, but participants may always opt out of participation.

Title 4 of ERISA sets out the responsibilities of plan fiduciaries charged with selecting and monitoring plan investments. Fiduciaries must invest like a prudent person “familiar with such matters”, which is sometimes referred to as the “prudent expert” rule. This imposes an obligation to consult outside experts if the fiduciaries do not have the required expertise. Fiduciaries must also diversify investments unless it is prudent not to do so, and avoid non-exempt related party and self-dealing transactions. For example, in the absence of an exemption, a fiduciary may not receive consideration for the fiduciary’s personal account as a result of a transaction involving the plan for which the fiduciary is responsible. Finally, a fiduciary must follow the terms of the plan unless the terms are inconsistent with ERISA.

Outsourcing of fiduciary responsibilities is permitted by ERISA. If responsibilities are outsourced to a “named fiduciary” in accordance with the plan document, the plan’s internal fiduciaries are responsible for prudently selecting the named fiduciary and for monitoring that fiduciary’s overall performance. ERISA creates three different types of special outsourcing arrangements:

• Plan fiduciaries may engage a 3(16) Administrator to expressly assume responsibility for plan administrative activities, such as filing annual reports (Forms 5500), processing plan loans and distributions, and performing non-discrimination testing.
• Fiduciaries may retain an investment manager that is a bank, insurance company or registered investment adviser to assume responsibility for plan investments, in which case they are not responsible for the manager’s day-to-day investment decisions, but remain responsible for prudently monitoring the performance of the manager.
• A new form of outsourcing to a pooled plan provider, or PPP, was created by the SECURE Act. A PPP is a named fiduciary registered with the DOL who is responsible for managing a pooled employer plan (PEP) in which unrelated employers participate. The PPP is responsible for running the plan and selecting outside service providers.

Another outsourcing option not mentioned in the statute is hiring an outsourced chief investment officer (OCIO) to assume responsibility for plan investments. OCIOs differ in the range of services they offer, but some will take on additional responsibilities, such as funding or plan design.

ERISA has always been asset neutral; that is, there are no lists of required or prohibited investments. Whether plans may take factors such as ESG and climate issues into account is a controversial topic in the US, with policies changing with different administrations. Fiduciaries are always required to select investments that are appropriate for the plan and cannot sacrifice returns to engage in socially desirable investments. The Biden Administration issued regulations permitting fiduciaries to use ESG factors as a tiebreaker if investments were otherwise economically equivalent. However, the Trump Administration is expected to issue replacement regulations that could prohibit all consideration of non-economic factors in making investment decisions or voting plan proxies.

There is ongoing litigation challenging any investments that take ESG factors into account, and a recent federal district court decision involving American Airlines 401(k) plans found that investments improperly took ESG factors into account and, even though there were no monetary damages, the court issued an order prohibiting American Airlines from taking ESG factors into account going forward.

Plan fiduciaries are also closely watching a lawsuit recently filed against a realty company in which, for the first time, plan participants seek to hold plan fiduciaries accountable for not taking climate risks into account.

Pension regulation of private and non-profit employer plans is at the national level. To ensure that these plan sponsors can apply uniform rules to employees in different parts of the country, ERISA pre-empts state pension laws. However, other federal laws, such as federal securities laws and the Age Discrimination in Employment Act, apply to pension plans and their fiduciaries. State insurance, banking and securities laws of general applicability are also not subject to ERISA pre-emption. In addition, several states have implemented savings programmes requiring employers who do not maintain plans for their employees to register and transmit employee contributions to state-run IRA programmes. A federal appeals court decision found that these laws are not pre-empted because employer involvement is minimal and the IRA programmes are administered at the state level.

Plans of state and local governments and their instrumentalities are not subject to ERISA, but their plans are subject to rules incorporated in state constitutions or statutes. In some cases, these will require the plans to be operated as if they were subject to ERISA.

Within 90 days of becoming eligible to participate, an employee must receive an SPD describing the basic provisions of the plan, including the rules determining vesting and entitlement to annual contributions and a description of any rules limiting benefits or resulting in benefit forfeiture. The SPD must be updated when there are material changes to the plan. Defined contribution plan participants must also receive notices regarding the plan’s safe harbour status, any automatic enrolment provisions that apply, and information about the plan’s investments (if participants can select investments) on becoming eligible and annually thereafter. Upon leaving the plan, participants will receive a benefit election packet if they are eligible for benefits and a notice of their rights to roll over any lump sum distribution into an IRA or a new employer’s plan.

Plans must vest participants no more slowly than 20% per year. Alternatively, plans may fully vest participants after three years of service with no prior vesting obligation. Under an additional special rule, plans may require two years of service rather than one year, in order to participate on the condition that the plan provides for immediate vesting. All plans must also fully vest participants at normal retirement age (usually aged 65).

If participation ceases because the plan is terminated, additional information is provided.

In addition to the communications mentioned above, plans are required to provide annual information about fees and investments to defined contribution plan participants who may select plan investments from a designated menu. Defined contribution plan participants also receive a summary annual report with important information contained in the plan’s most recent Annual Report (Form 5500). Defined benefit plan participants must also receive an annual notice of the plan’s funded status. ERISA also requires many plan documents to be provided to participants on request, including copies of the complete Form 5500 and the plan and trust documents.

Plan sponsors are obliged to provide benefit statements to participants on a plan-by-plan basis, but no law requires them to provide a unified disclosure of all participant benefits. Required benefit statements will list accruals to date and the number of years for a participant to become fully vested if the participant is not fully vested. Plans which permit participants to select from a preset menu of investment options must provide annual investment statements in addition to quarterly account statements that itemise the fees taken from the account during the preceding quarter. Defined benefit plan participants are required to receive statements no less frequently than once every three years. In general, new participants must receive one paper statement per year from defined contribution plans, and defined benefit plans must provide paper statements once every three years.

Awards under plans that are “qualified” under IRC Section 401(a), which include pension and 401(k) plans in the United States, are entitled to special tax benefits. The plans become “qualified” by complying with special eligibility, vesting and non-discrimination requirements in the IRC. Trust earnings are not subject to tax when earned. New plans, terminating plans and certain other plans may apply for determination letters from the IRS confirming that their form satisfies qualification requirements and that their trust is exempt from tax.

The specific tax treatment of IRAs, SIMPLE plans and IRAs, SEP plans and IRAs, and Solo 401(k) plans may differ from the treatment for traditional pension plans and is not described in detail here. The time of taxation for beneficiaries may also differ, and there are detailed rules that address the time of taxation for beneficiaries of qualified pension plans.

Defined Benefit Pension Plans

Employer contributions to a defined benefit plan entitle the employer to take a tax deduction at the time of contribution up to certain limits under IRC Section 404, even though the amounts are not in fact paid to employees until future years.

Employees are subject to income tax only when distributions from a defined benefit plan are made to the employee, and they are not subject to taxation (including employment taxes) at the time the employer contributions are made or at the time the rights to the benefits under the plan vest. The timing of taxation does not change if the distribution is a lump sum, instalments or an annuity. That is, even if the plan purchases an annuity to satisfy its obligations under the plan, the employee pays taxes when the benefit payments are made to the employee. An automatic 20% income tax withholding applies if lump sums are not directly rolled over to the trustee or custodian of an IRA or a new employer’s qualified plan. An employee will be subject to an additional 10% tax on pension payments before the age of 59 years and six months, called “early distributions”, unless very specific exceptions apply (which may include the employee’s total disability or death).

401(k) Plans

Employer contributions to a 401(k) plan entitle the employer to take a tax deduction at the time of contribution up to certain limits under IRC Section 404.

An employee eligible to participate in their employer’s 401(k) plan can elect to have a portion of the employee’s compensation contributed to the plan on a pre-tax or after-tax (“Roth”) basis. The amount an employee may defer is subject to limitation each year under IRC Section 402(g) (a limit of USD24,500 for 2026). Employee pre-tax contributions and employer contributions are generally not subject to income tax at the time contributed. Earnings on the contributions to the plan will grow on a tax deferred basis, and the employees will first pay income taxes at the time distributions are made to the employee. Typically, payments from a 401(k) plan of a taxable distribution that is not directly rolled over to the trustee or custodian of an IRA or new employer’s qualified plan will require an automatic 20% income tax withholding at the time of payment. If an employee takes a distribution from the plan prior to the age of 59 years and six months, the employee will also be subject to an additional 10% tax, subject to certain exceptions. The general exception to this rule regarding taxation upon distribution is when amounts are properly rolled over into another “eligible retirement plan” including another 401(k) plan.

While the employee pre-tax contributions to a traditional 401(k) plan are not subject to federal income tax at the time of deferral, and thus not reported in Box 1 of the employee’s Form W-2, the deferrals are included as wages subject to withholding for Social Security and Medicare taxes and also for the purposes of federal unemployment taxes.

Some 401(k) plans also allow employees to make deferrals on an after-tax basis. Roth contributions to the plan are subject to income as well as employment taxes at the time of contribution but are not subject to any tax on distribution, if a holding period requirement is met and the participant is 59 years and six months. Non-Roth after-tax contributions are not eligible for special Roth treatment on distribution (so earnings become taxable) but can exceed the annual deferral limits under IRC Section 402(g). Roth contributions count towards the Section 402(g) limit.

To dispute the tax treatment of contributions to a pension plan, the party disputing the treatment (whether an employer or an employee) will need to file a formal written protest with the IRS or file an amended tax return, similar to any claims or dispute resolution regarding tax treatment or deductions.

For issues relating to the qualification of a pension plan or to address specific administrative issues that could compromise the qualification of a plan, the employer will typically first make a correction in accordance with the process permitted under the Employee Plans Compliance Resolution System (EPCRS) and in some cases a filing under the EPCRS’s Voluntary Compliance Program (VCP) may be appropriate. If the plan is under audit, there are processes under the EPCRS to address corrections. Potential plan disqualification can be challenged in the tax court, the court of claims or federal district courts.

Enforcement by ERISA

Most private pension plans are regulated by ERISA, which generally supersedes all state laws that relate to employee benefit plans to the extent subject to ERISA. Accordingly, most pension-related disputes fall under the federal ERISA civil enforcement framework.

ERISA Section 502

The most common causes of action are enumerated in Section 502 of ERISA, which includes claims to recover benefits, enforce rights under the plan, and clarify rights to future benefits. Section 502 also includes causes of action for breach of fiduciary duty, equitable relief, failure to provide benefit statements, multiemployer plan actions, and challenging the selection of annuity providers in connection with a pension risk transfer. ERISA also deals with civil causes of action for discrimination, retaliation, delinquent contributions, PBGC actions, and actions relating to withdrawal liability.

Internal claims and appeal procedures

With respect to benefits disputes, pension plans are required to maintain reasonable internal claims and appeal procedures. Courts will generally not hear a benefits dispute until the participant or beneficiary has exhausted such procedures. A claimant can bring suit following a final adverse determination from the plan administrator in accordance with the plan’s procedures. Courts will review plan administrator decisions de novo (ie, without deference) unless, as is common, the plan terms give the administrator discretionary authority to construe the terms of the plan or determine eligibility. Courts will then apply an abuse-of-discretion standard.

Role of federal and state courts

Generally, federal district courts have exclusive jurisdiction over civil actions under ERISA, but state courts have concurrent jurisdiction over claims to recover benefits, enforce plan rights, or clarify rights to future benefits. With respect to benefits claims, suit may be brought where either the plan is administered, the breach took place, or the defendant resides.

In claims for benefits, available remedies include payment of benefits, clarification of rights, and interest. Courts also have the discretion to award attorneys’ and court costs to either party. Remedies for fiduciary breaches may include restoration of plan losses, disgorgement, fiduciary removal, equitable relief such as an injunction, penalties, and attorneys’ fees. Under the high legal standard imposed on plan fiduciaries, fiduciaries can be held personally liable for plan losses. In connection with pension risk transfers, ERISA also permits actions for the posting of security to assure payment under annuity contracts or other appropriate relief.

Arbitration

Voluntary arbitration is generally permitted under ERISA, but the enforceability of mandatory arbitration provisions may be contested. The appellate courts agree that fiduciary breach claims cannot be subject to mandatory arbitration, but the Supreme Court has never ruled on that question.

Statute of limitations

With respect to the statute of limitations, fiduciary breach claims must generally be brought by the earlier of six years after the last breach or three years after the claimant had actual knowledge of such breach. In the event of fraud or concealment, the statute of limitations is extended until six years after the discovery of the breach. No limitations period is specified for claims for benefits or to enforce or clarify rights to benefits. In such cases, courts typically rely on the most analogous state-law limitations period, frequently the period for breach of a written contract.

Administrative proceedings relating to pension plans are conducted by the DOL, the PBGC, and the IRS. The DOL oversees ERISA fiduciary standards, reporting and disclosure obligations, and prohibited transaction rules. The PBGC administers the federal insurance programme for pension plans and supervises plan terminations and the payment of PBGC insurance premiums. Lastly, the IRS enforces the tax qualification requirements applicable to pension plans under the IRC.

The DOL

The DOL has broad investigative authority under ERISA to conduct audits. Participants, beneficiaries or fiduciaries may also request that the DOL initiate discretionary enforcement actions. The majority of DOL enforcement actions are resolved through settlement as part of the audit process. If a resolution cannot be reached, the DOL pursues most causes of action by filing a lawsuit in a federal district court; however, the DOL’s assessment of civil penalties for reporting and disclosure failures, fiduciary breaches, and prohibited transactions are subject to administrative review. In such cases, the affected party may contest a DOL assessment or determination by filing a request for a hearing before an administrative law judge. The administrative law judge’s decision may be appealed to the DOL’s Administrative Review Board for a final administrative decision. Once this process is exhausted, a party may seek judicial review in federal court under the Administrative Procedure Act.

The PBGC

The PBGC administers insurance programmes that protect pension plan participants if a single employer plan is terminated without sufficient assets to pay all benefits. The PBGC collects mandatory insurance premiums, provides financial assistance to multiemployer plans, and steps in as statutory trustee when a distressed plan terminates or fails. In a single-employer standard termination, the plan must pay all accrued benefits through lump-sum payments or the purchase of annuities. The PBGC conducts post-termination audits to ensure compliance with ERISA and PBGC regulations, including the calculation and distribution of benefits. This process is critical, as PBGC insurance coverage ceases once plan liabilities are transferred to an insurer through an annuity purchase. In such event, participants must rely on state insurance regulators and state guaranty association protections if the insurer becomes insolvent.

In connection with audits and filings, the PBGC will issue a written decision stating the reasons for its determinations, and plan sponsors may request reconsideration of such determinations. If no resolution is reached, plan sponsors may file a written administrative appeal explaining the basis for the challenge and requested relief to the PBGC Appeals Board. The Board conducts an independent review, and its decision is the final step in the PBGC’s administrative process. Following exhaustion of these administrative remedies, a party may seek judicial review of an adverse PBGC determination in federal district court under the Administrative Procedure Act.

The IRC

Pension plans must meet certain qualification and compliance requirements set forth in the IRC to maintain their tax-favoured treatment. The IRS enforces these requirements through audits, determination letters and correction programmes. Most disputes are subject to the IRS’s administrative processes, which may include tax protests or amending tax returns. If an agreement cannot be reached, challenges to IRS-proposed disqualification determinations may be litigated in the tax court, federal district court, or, in some cases, the court of claims. The tax court permits plaintiffs to dispute deficiencies before paying the disputed amount in front of judges who are tax experts. On the other hand, federal district courts require payment of the disputed amount prior to commencing litigation but may be less inclined to support the IRS’s position.