What Is the Employee Retirement Income Security Act (ERISA)?
The Employee Retirement Income Security Act (ERISA) is a federal law that protects the retirement assets of American workers. The law, which was enacted in 1974, implemented rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. It also covers certain non-retirement accounts, such as employee health plans.
Under the law, plans must regularly inform participants about their features and funding. ERISA is enforced by the Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL).
- ERISA is a federal law that implements standards for certain employer-sponsored retirement plans and regulations for plan fiduciaries.
- The law has gone through a series of changes since it was first enacted in 1974.
- ERISA prohibits fiduciaries from misusing funds and also sets minimum standards for participation, vesting, benefit accrual, and funding of retirement plans.
- It also grants retirement plan participants the right to sue for benefits and breaches of fiduciary duty.
- Regulations and standards established by ERISA also extend to employer-sponsored healthcare plans.
Understanding the Employee Retirement Income Security Act (ERISA)
ERISA was established by the federal government in 1974 and holds fiduciaries responsible for their actions as they relate to the maintenance of certain employer-sponsored retirement and health plans.
Plans that fall under its mandate include defined-benefit plans and defined-contribution plans, such as 401(k) plans, 403(b) plans, employee stock ownership plans (ESOPs), and profit-sharing plans. ERISA also covers certain private-sector health plans, including health maintenance organization (HMO) plans, flexible spending accounts (FSAs), disability insurance, and life insurance.
Under ERISA, a fiduciary is anyone who exercises discretionary authority or control over a plan’s management or assets, including those who provide investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan. ERISA also addresses fiduciary provisions and bans the misuse of assets through these provisions.
The law also sets minimum standards for participation, vesting, benefit accrual, and funding. The law defines how long a person may be required to work before they're eligible to participate in a plan, accumulate benefits, and have a non-forfeitable right to those benefits. It also establishes detailed funding rules that require retirement plan sponsors to provide adequate funding for the plan.
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-benefit pension plan is terminated, ERISA guarantees payment of certain benefits through a federally chartered corporation known as the Pension Benefit Guaranty Corporation (PBGC).
Not every employer-sponsored retirement plan is subject to the terms of ERISA. ERISA does not cover plans set up and maintained by government entities and churches. Plans set up by companies outside the United States for nonresident employees are not covered by ERISA, either.
ERISA and Small Businesses
ERISA rules can often be complicated. As such, they may deter some small business owners from setting up retirement accounts for their employees.
There are alternatives that allow these companies to sidestep some of the confusing regulations. For example, small businesses with 100 or fewer employees can use SIMPLE IRAs. This type of tax-deferred retirement savings plan is covered by ERISA and doesn’t have the reporting and administrative burden that qualified retirement plans such as 401(k)s do. SIMPLE IRAs are easier to set up, too.
Employers must follow ERISA rules that dictate which employees are eligible and how a company handles employee contributions, and they are required to clearly spell out details of the plan's features within a summary plan description.
ERISA and Healthcare
ERISA provides protections to workers who participate in various healthcare plans, including mandatory plans, plans that receive employer contributions, and plans that outline how funds are to be administered. Any plans that don't come with these mandates are not covered by the law.
Under the legislation, providers must inform participants of any and all details of their plans, including:
- Coverage eligibility
- Full disclosure about any associated costs, such as premiums, deductibles, and copays
- Information about networks and how to make claims
The law was amended following the passing of the Affordable Care Act (ACA), which mandated that employers with 50 or more workers offer healthcare coverage, put a cap on out-of-pocket expenses and eliminated the denial of coverage because of preexisting conditions. Some people are also eligible to remain under their parents' plan until the age of 26.
ERISA Regulation and Standards
As noted above, ERISA is a federal law that is regulated by a division of the DOL known as the Employee Benefits Security Administration (EBSA). This agency provides assistance and education to individual workers, corporations, and plan managers about retirement and healthcare plans.
To ensure compliance with ERISA, plans are required to provide participants with updates and statements. Plan administrators must submit statements to participants for the first quarter during the second quarter, for the second quarter in the third quarter, and so on. Certain notices and forms must also be sent to participants accordingly.
Plans must also make sure they follow plan document terms, provide regular fee disclosures every 12 months, update participants of any changes in the plan in a timely fashion, and make deposits and deferrals on time.
Plan administrators may choose to manage the paperwork on their own. But if it proves to be cumbersome, they may hire a third party to do the work for them. Doing so, however, doesn't absolve the administrator from its fiduciary responsibility to its participants.
Retirement accounts that qualify under ERISA are generally protected from creditors, bankruptcy proceedings, and civil lawsuits. If your employer declares bankruptcy, your retirement savings are not at risk and your creditors cannot make a claim against funds held in your retirement account if you owe them money.
History of the Employee Retirement Income Security Act (ERISA)
Over the years, various legislation had been passed concerning the labor and tax aspects of employee pension plans. The culmination of this was ERISA: Its Title I provisions were enacted to address public concern that funds of private pension plans were being mismanaged and abused.
For instance, more than 4,000 workers lost some or all of their pension plan benefits when Studebaker closed its Indiana factory in 1963. These benefits were shuttered because the plan was underfunded. The Teamsters' Central States Pension Fund brought the issue of fiduciary malfeasance related to retirement accounts into the public eye in the 1960s and 70s. The fund had a history of questionable loans to Las Vegas casinos and real estate developments.
These are just two examples that show the irregularities that ERISA proposed to address when it was first enacted. The U.S. House of Representatives passed the law in February 1974 and it was sent to the Senate, where it was approved the following month. ERISA was signed into law by President Gerald Ford on Sept. 2, 1974.
The law increased the responsibility of EBSA and has gone through several changes since it was first enacted. For instance, lawmakers approved amendments to reduce the age limit required by employers for retirement plan participation, as well as expanding the total time a worker is allowed to be away from work before they lose out on their plan's vesting period.
Healthcare legislation also led to changes in ERISA. For example, the COBRA program of 1985 ensured the continuation of health insurance coverage after an individual's employment situation changes.
What Is the Main Purpose of ERISA?
The main purpose of ERISA is to protect the interests of workers who participate in employee benefit plans, including certain retirement and healthcare plans. Protections extend to retirees as well as plan beneficiaries. ERISA regulates plan administrators and sponsors to ensure they provide plan information to their participants and remain compliant with their fiduciary duties.
What Does ERISA Cover?
Plans that are covered under ERISA include employer-sponsored retirement plans, such as 401(k)s, pensions, deferred compensation plans, and profit-sharing plans. ERISA also covers certain non-retirement plans like HMOs, FSAs, disability insurance, and life insurance.
Who Is Eligible for ERISA?
ERISA applies to anyone who works for a partnership, limited liability company, S-corporation, C-corporation, nonprofit organization, and even businesses with only one employee. Churches and religious organizations aren't typically covered, and plans that operate outside the United States primarily for the benefit of nonresident aliens aren't covered.
What Does ERISA Have to Do With Health Insurance?
The majority of health insurance plans that are offered by employers are covered under ERISA. Plans that fall in this category include mandatory plans, plans that receive employer contributions, and plans that outline how funds are to be administered.
Is an Employer a Fiduciary Under ERISA?
Anyone who has discretionary authority or control of certain employer-sponsored retirement or healthcare plans, or anyone who provides investment advice on the direction of these assets, is considered a fiduciary. This includes trustees, plan administrators, and investment committees.
What Are ERISA Violations?
ERISA violations occur when a fiduciary doesn't live up to their responsibility. For instance, a plan administrator who doesn't provide full disclosure about fees and plan benefits commits a violation. Someone who fails to send updated information about plans to participants, including statements, disclosures, and notices, is also guilty of violating the law.