What Is the Employee Retirement Income Security Act (ERISA)?

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What Is the Employee Retirement Income Security Act (ERISA)?

Let me explain ERISA directly to you: it's a federal law that protects the retirement assets of American workers. This law lays out rules that qualified plans must follow to make sure plan fiduciaries don't misuse plan assets. It also applies to certain health plans. Under ERISA, plan administrators have to keep participants informed about the plan on a regular basis. The Employee Benefits Security Administration (EBSA), part of the U.S. Department of Labor (DOL), enforces it.

Key Takeaways

ERISA is a federal law that puts standards in place for certain employer-sponsored retirement and health plans. Since it was enacted in 1974, the law has seen a series of changes. It strictly prohibits fiduciaries from misusing funds. And it establishes standards for participation, benefit accrual, vesting, and funding of retirement plans.

Understanding ERISA

The federal government set up ERISA in 1974, and it holds fiduciaries responsible for their actions in maintaining certain employer-sponsored retirement and health plans. Plans 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.

Fiduciaries

ERISA deals with fiduciary provisions and bans the misuse of assets through them. Under the law, a fiduciary is anyone who has discretionary control or authority over plan management or assets, including those who give investment advice for the plan. If fiduciaries don't follow the principles of conduct, they can be held responsible for restoring losses to the plan.

Plan Guidelines

The law sets minimum standards for participation, vesting, benefit accrual, and funding. ERISA gives participants the right to sue for benefits and breaches of fiduciary duty, as noted by the EBSA. To make sure participants don't lose their retirement assets if a defined-benefit pension plan ends or in cases like company bankruptcy, ERISA guarantees payment of certain benefits through the federal Pension Benefit Guaranty Corporation (PBGC).

Fast Fact

Not every employer-sponsored retirement plan falls under ERISA. It doesn't cover plans set up or maintained by government entities and churches, and plans maintained outside the United States for nonresident employees aren't covered either.

ERISA and Small Businesses

ERISA rules can be complicated, which might deter some small business owners from setting up retirement accounts for their employees. But there are alternatives that let small businesses avoid some of that complexity. For instance, small businesses with 100 or fewer employees can offer SIMPLE IRAs to their employees. This type of tax-deferred retirement savings plan is covered by ERISA but doesn't carry the same reporting and administrative burden as plans like 401(k)s. Small business employers must follow ERISA rules on which employees are eligible and how to handle employee contributions. They also need to clearly explain the plan's features with a summary plan description.

ERISA and Healthcare

ERISA provides protections to workers in various healthcare plans. Under the law, plan administrators must update participants about eligibility, benefits, claims, and cost-sharing provisions like premiums, deductibles, and copays. The law was amended with the Affordable Care Act (ACA), which required employers with 50 or more workers to offer healthcare coverage. It capped out-of-pocket expenses and eliminated denial of coverage due to preexisting conditions.

ERISA Regulation and Standards

The EBSA administers and enforces ERISA. To stay compliant, plan administrators must follow the plan document terms, make deposits and deferrals on time, submit notices, disclosures, and forms to participants, and update them on any changes within required time frames. Administrators can handle the paperwork themselves, but if it's too much, they can hire a third party. Even then, it doesn't remove their fiduciary responsibility to participants.

Important Note

Retirement accounts that qualify under ERISA are generally protected from creditors, bankruptcy proceedings, and civil lawsuits.

History of ERISA

ERISA came about from a series of laws aimed at regulating pension plans, driven by public concern in the 1960s and 1970s over mismanagement and abuse of private pension funds. For example, the Teamsters Union's Central States Pension Fund had questionable loans tied to Las Vegas casinos and real estate. And in 1963, when Studebaker closed its Indiana factory, over 8,500 auto workers lost some or all of their pension benefits. President Gerald Ford signed ERISA into law on September 2, 1974, stating it would finally give American workers solid protection in their pension plans.

Changes to ERISA

Since its enactment, the law has seen several changes. Lawmakers approved an amendment that extended the time a worker can be away from work before losing their plan's vesting period. ERISA also created a process for spouses to claim access to a participant's retirement benefits during divorce via a qualified domestic relations order (QDRO). The law has modified healthcare insurance too, like with COBRA in 1985, which ensured continued health coverage after changes in employment.

Who Is Eligible for ERISA?

ERISA applies to essentially anyone with a qualified plan who works for a partnership, limited liability company, S-corporation, C-corporation, or nonprofit organization—it even covers businesses with only one employee. However, governmental and religious organizations aren't typically covered, and plans operating outside the U.S. primarily for nonresident employees aren't either.

What Does ERISA Have to Do With Health Insurance?

Most health insurance plans offered by employers are covered under ERISA.

What Are ERISA Violations?

ERISA violations happen when a fiduciary doesn't meet their responsibilities as outlined by the law. For instance, a plan administrator who doesn't provide full disclosure about fees and plan benefits may be in violation. This could also apply if a fiduciary misuses funds or fails to send updated information to participants, including statements, disclosures, and notices.

The Bottom Line

As a federal law, ERISA's main purpose is to protect the interests of workers in qualified plans, including certain employer-sponsored healthcare and retirement plans like 401(k)s and pensions. It regulates plan administrators and sponsors to ensure they provide plan information to participants and stay compliant with their fiduciary duties. And it's not just you as a participant who's protected—it's your beneficiaries too.

What Is the Employee Retirement Income Security Act (ERISA)?

Highlights