pension
Pension is a retirement arrangement designed to provide income or savings after employment ends. In ordinary usage, pension often means a defined benefit plan that promises a periodic benefit under a certain formula. Under the Employee Retirement Income Security Act of 1974 (ERISA), however, an employee pension benefit plan is a broader category that can include both traditional defined benefit plans and individual-account or defined contribution plans, such as many 401(k) plans, when they are established or maintained to provide retirement income or defer income until employment ends or beyond.
In a defined benefit plan, the plan promises a benefit commonly based on compensation, service, age, or another formula, and the plan sponsor bears the principal funding and investment risk. In a defined contribution plan, each participant has an individual account, and the ultimate benefit depends on contributions, investment gains or losses, expenses, and the plan's terms. The legal classification matters because funding, insurance, distribution, and other rules differ by plan type.
ERISA sets federal minimum standards for most voluntarily established private-sector pension plans. It generally requires plan information and a Summary Plan Description, imposes fiduciary duties, and contains participation, vesting, funding, benefit-payment, and enforcement rules that vary by plan type. ERISA generally does not cover governmental plans or certain church plans, and other exclusions apply. ERISA generally does not require an employer to establish a retirement plan. It regulates covered plans that are established, and employers or other plan sponsors that maintain or terminate them must comply with applicable law and the plan's terms.
Vesting determines when a participant's accrued benefit becomes nonforfeitable. An employee's own contributions generally are nonforfeitable, while employer-provided benefits may vest under a schedule permitted by law and the plan. A vested benefit is nonforfeitable, but vesting does not fix every payment amount, commencement date, or payment form; the plan formula, qualified domestic relations orders, statutory limits, and other plan terms still matter. Participants should consult the plan document and Summary Plan Description for eligibility, accrual, vesting, distribution, survivor-benefit, and claims procedures.
ERISA coverage and federal tax qualification are related but separate. Internal Revenue Code § 401 sets requirements for certain qualified plans and their tax treatment; a plan's tax status does not alone answer every ERISA question. The Pension Benefit Guaranty Corporation insures benefits in many private-sector defined benefit plans subject to statutory limits, but generally does not insure defined contribution accounts. Social Security and a personal individual retirement account established independently of an employer are also retirement-income arrangements, but they are not the same as an employer pension plan under ERISA.
[Last reviewed in August of 2026 by the Wex Definitions Team]
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