An occupational pension is a retirement plan your employer sponsors to help you build income for the years after you stop working. The money sits in a tax-advantaged trust, grows over your career, and pays out when you retire. Two structures dominate: a defined benefit plan promises you a specific monthly check for life, while a defined contribution plan like a 401(k) gives you an individual account whose eventual value depends on contributions and investment returns. Federal law under ERISA and the Internal Revenue Code sets the rules for how these plans are funded, vested, protected, and taxed.
Defined Benefit Plans
A defined benefit plan is what most people picture when they hear the word “pension.” Your employer promises a specific monthly payment at retirement, calculated from a formula that usually factors in your final average salary, your years of service, and a fixed multiplier. If the formula is 1.5% × years of service × final average salary, and you worked 30 years earning an average of $80,000 near the end, your annual pension would be $36,000.
The employer carries all the investment risk. Actuaries calculate how much the plan needs today to cover every promised future payment, and the employer must contribute enough each year to hit that funding target.1Office of the Law Revision Counsel. 26 U.S. Code 430 – Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans If investments underperform, the employer writes a bigger check. If they outperform, the required contribution goes down. Your promised benefit stays the same either way.
Benefits are almost always paid as a lifetime annuity, so you receive a monthly check for the rest of your life. Married participants are automatically offered a joint-and-survivor annuity that continues paying a reduced amount to a surviving spouse.2Internal Revenue Service. When Can a Retirement Plan Distribute Benefits? That predictability is why defined benefit plans remain common in government and unionized industries even as the private sector has shifted toward 401(k)s.
Defined Contribution Plans
A defined contribution plan flips the structure. Nobody promises you a specific retirement payment. You and your employer contribute money to an individual account in your name, and your eventual retirement income depends entirely on how much accumulates. The 401(k) is the most common example.
You direct how your account balance is invested, choosing from a menu of funds the plan offers. That means you carry the investment risk. A strong stock market grows your balance faster; a downturn shrinks it, and your employer has no obligation to make up the difference.
Contributions come mainly through salary deferrals withheld from your paycheck before federal income tax is calculated, which reduces your current taxable income.3Internal Revenue Service. 401(k) Plan Overview For 2026, the IRS caps those deferrals at $24,500. Workers aged 50 and older can add $8,000 in catch-up contributions, and under a SECURE 2.0 provision, workers who turn 60, 61, 62, or 63 during the year can defer an extra $11,250 instead.4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 That enhanced window closes once you turn 64.
When you retire, the account balance is yours to draw down as a lump sum, through periodic withdrawals, or by purchasing an annuity.2Internal Revenue Service. When Can a Retirement Plan Distribute Benefits?
How the Money Gets In
Occupational pensions draw from three sources: your contributions, your employer’s contributions, and investment returns on the pooled money. The balance among those depends on the plan type.
In a defined benefit plan, the employer is legally required to contribute enough each year to meet the plan’s actuarially determined funding obligations.5Office of the Law Revision Counsel. 29 U.S. Code 1082 – Minimum Funding Standards The amount can swing substantially from year to year with investment performance and interest rates. Most DB plans are funded entirely by the employer, though some require employee contributions as well.
In a defined contribution plan, employer funding usually takes the form of matching contributions tied to how much you defer. A common formula matches 50 cents on every dollar you put in, up to 6% of your salary. Contribute nothing, and the match is zero. That’s money left on the table.
All plan assets sit in a trust that is legally separate from the employer’s business.6Office of the Law Revision Counsel. 29 U.S. Code 1103 – Establishment of Trust If your employer goes bankrupt, creditors cannot reach the pension fund. The trustee manages the assets solely for the benefit of participants.
When Employer Contributions Become Yours
Your own contributions are always 100% yours from day one. You cannot lose them, even if you quit tomorrow.7Internal Revenue Service. Retirement Topics – Vesting Vesting rules apply only to what the employer puts in, whether that’s a 401(k) match or the accrued benefit in a defined benefit plan.
Federal law gives employers two vesting structures to choose from:8Office of the Law Revision Counsel. 26 U.S. Code 411 – Minimum Vesting Standards
- Cliff vesting: you own 0% of employer contributions until you complete three years of service, at which point you become 100% vested all at once.
- Graded vesting: you vest in stages over six years, moving from 20% after two years to 100% after six.
Employers can vest you faster than the law requires, and many do. Before leaving a job, check the schedule. Walking away six months short of full vesting can cost you thousands in forfeited employer contributions.
Spousal Protections
If you’re married and enrolled in a defined benefit plan, your spouse has legal protections built into the plan. The default form of payment is a qualified joint and survivor annuity, which pays a reduced monthly amount during your lifetime and then continues paying your surviving spouse after you die.9eCFR. 26 CFR 1.401(a)-20 – Requirements of Qualified Joint and Survivor Annuity You cannot switch to a single-life annuity or lump sum without your spouse’s written, witnessed consent.
Most 401(k) plans are not subject to those automatic survivor annuity rules, but your spouse is still the default beneficiary of the account under federal law. Naming anyone else as beneficiary requires your spouse’s signed consent. Divorce changes the picture: a qualified domestic relations order can assign part of your pension to a former spouse, and a new spouse’s rights attach only to whatever remains.
Getting Money Out
You can generally take distributions from an occupational pension without penalty once you reach age 59½.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Your plan document may also define a normal retirement age, often 65, at which full benefits become available.
Withdrawals before 59½ get hit with a 10% additional tax on top of ordinary income tax, unless you qualify for an exception. The one most relevant to job changes is separation from service at 55 or older: if you leave your job during or after the year you turn 55, you can take distributions from that employer’s plan penalty-free. Public safety employees of state and local governments get this break starting at age 50.11Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions from Retirement Plans Other Than IRAs One boundary worth knowing: the $10,000 first-time homebuyer exception applies only to IRAs, not to 401(k)s or traditional pensions.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
If your contributions went in pre-tax, every dollar that comes out is taxed as ordinary income.12Internal Revenue Service. Topic No. 410, Pensions and Annuities That applies to both defined benefit pension checks and defined contribution withdrawals. The plan administrator withholds federal income tax from each payment and reports the distribution on IRS Form 1099-R.13Internal Revenue Service. About Form 1099-R After-tax and Roth contributions are tracked as basis and come out untaxed on that portion.
Many defined contribution plans also let you borrow against your own account balance and repay yourself with interest, though the loan can turn into a taxable distribution if you leave the job before paying it back.14Internal Revenue Service. Retirement Plans FAQs Regarding Loans
Required Minimum Distributions
The government doesn’t let you defer taxes forever. Starting at age 73, you must begin taking required minimum distributions from your retirement accounts each year.15Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Under SECURE 2.0, the starting age rises to 75 for people born after 1959. Your first RMD is due by April 1 of the year after you reach the applicable age, and every subsequent RMD is due by December 31.
Employer plans carry one useful exception: if you’re still working at the company that sponsors the plan and you own 5% or less of the business, you can delay RMDs from that specific plan until you actually retire. This doesn’t help with IRAs or plans from former employers.
Missing an RMD used to trigger a 50% penalty on the shortfall. SECURE 2.0 reduced that to 25%, and to 10% if you correct the mistake within two years.
What Protects You If the Plan Fails
The Pension Benefit Guaranty Corporation insures most private-sector defined benefit plans. If your employer’s pension plan runs out of money or terminates without enough assets to cover the promised benefits, the PBGC steps in and pays a guaranteed portion of what you were owed.16Pension Benefit Guaranty Corporation. PBGC Pension Insurance: We’ve Got You Covered
For 2026, the maximum monthly guarantee for someone starting benefits at age 65 is $7,789.77 as a straight-life annuity or $7,010.79 as a joint-and-50%-survivor annuity. The caps are lower if you start before 65 and higher if you start later.17Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables Most retirees fall well within these limits, so PBGC coverage fully replaces their benefit; an unusually large pension could see a reduction.
PBGC does not cover defined contribution plans like 401(k)s, profit-sharing plans, IRAs, or government and religious organization pensions.16Pension Benefit Guaranty Corporation. PBGC Pension Insurance: We’ve Got You Covered With a 401(k), your account balance already sits in a separate trust and belongs to you individually, so there’s nothing for PBGC to insure. The risk you face in a DC plan is investment performance, not employer insolvency.
What Happens When You Leave the Job
When you leave an employer, you have several choices for handling your vested pension assets:
- Leave the money in your former employer’s plan. Your balance stays invested and grows tax-deferred until you’re ready to take distributions. This can make sense when the old plan has low fees or strong investment choices you can’t get elsewhere.
- Roll it into your new employer’s plan, if that plan accepts incoming rollovers. The transfer must go directly from one plan trustee to the other. If the check passes through your hands instead, the old plan is required to withhold 20% for federal income tax, and you’ll have to make up that 20% from other funds to complete the rollover or face taxes and potential penalties on the shortfall.18Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
- Roll it into an IRA. You get the widest range of investment options and full control over fees. A direct rollover to a traditional IRA avoids the 20% withholding and preserves the tax deferral. A rollover into a Roth IRA is allowed, but the taxable portion becomes income in the year of conversion.
Whichever option you choose, the former plan files a Form 1099-R reporting the distribution to the IRS.13Internal Revenue Service. About Form 1099-R A direct rollover is coded differently than a cash distribution, so confirm the 1099-R matches what actually happened.
If your former employer terminates the plan entirely, all participants become 100% vested regardless of how long they worked there.19Internal Revenue Service. Terminating a Retirement Plan The plan must distribute all assets, usually within 12 months of the termination date, and you’ll receive a rollover notice explaining your options and the tax consequences of each.