Understanding Pension Benefits After Termination: What You Need to Know

Woman being fired from her job.

A pension is an employer-sponsored retirement plan that allows an employee to contribute a portion of his earnings toward retirement years. Some employers may match a portion of the employee's contributions so the pension account grows even faster. These added employer contributions are subject to the retirement plan's vesting requirements and may or may not be available to an employee who is terminated.

Vesting in a Pension Plan

To be vested in a retirement plan means an employee has worked the required amount of time -- defined by the pension plan -- to be entitled to receive the full benefits of the plan. If the employee is terminated from employment -- whether voluntarily or involuntarily -- prior to being vested, the employee is entitled to only the amount personally contributed to the fund. These contributions may be transferred to another retirement account upon termination to avoid being taxed on the return of contributions.

Termination after Vesting

If the employee is terminated from a company after being vested, the employee is entitled to receive full retirement benefits upon reaching retirement age. For a defined-contribution plan, this means the full cash value of the plan, including employer contributions, will be available upon retirement. The employee may choose to transfer these funds to a new retirement account and continue making contributions. For a defined-benefit plan, benefits will be paid upon retirement based on factors such as year of service to the company, as defined by the plan.