The Employee Retirement Income Security Act (ERISA) covers some of the most popular retirement savings plans in the United States. But do you know which ones? First, let's test your knowledge.
Which of the following accounts does ERISA cover?
C. Corporate defined-benefit plan
And the Answer Is...
The correct answer is "C." ERISA covers most employer-sponsored retirement plans. But public employee plans, such as the state pension plan in answer "B," are exempt from coverage.
- Most employer-sponsored plans, such as a 401(k), fall under ERISA.
- Government employee plans and IRAs do not.
- ERISA was enacted in the 1970s to protect the retirement income of workers.
"A" is not correct because the IRA is an individual plan, not an employer plan. And we cheated: A Coverdell savings account is a college savings account, not a retirement plan.
Accounts Covered by ERISA
ERISA was enacted in 1974 to protect the retirement income of workers by holding the fiduciaries of plans accountable to certain standards and rules.
Retirement accounts that qualify under ERISA are, in general, protected from creditors.
ERISA can cover both defined-benefit and defined-contribution plans offered by employers. Common types of employer-sponsored retirement accounts that fall under ERISA include 401(k) plans, pensions, deferred-compensation plans, and profit-sharing plans.
It does not cover retirement plans set up and administered by government entities and churches, such as many 403(b) plans. In addition, ERISA laws don't apply to Simplified employee pensions (SEPs) and, as mentioned above, IRAs.
ERISA also covers some non-retirement accounts, such as employee health and welfare benefit plans. Some common examples include health maintenance organization (HMO) plans, health reimbursement accounts (HRAs), flexible spending accounts (FSAs), disability insurance, life insurance, and certain welfare benefit plans.
Plans covered under ERISA are often referred to as qualified plans. In order to qualify under ERISA, plan sponsors must meet a number of federal requirements regarding funding, vesting, participation, and the accrual of benefits.
Plan sponsors must also give detailed reports to the government. In addition, they are also required to provide plan participants with documents detailing how the plan works and the benefits offered.
In addition to keeping participants informed of their rights, ERISA also grants participants the right to sue for benefits and breaches of fiduciary duty. To ensure that participants do not lose their retirement contributions if a defined plan is terminated, ERISA guarantees payment of certain benefits through a federally chartered corporation known as the Pension Benefit Guaranty Corporation.
The Bottom Line
ERISA was implemented to protect the retirement plan assets of workers. It covers most employer-sponsored plans in the private sector. If you are unsure whether or not your plan qualifies under ERISA, contact its administrator.