ERISA stands for the Employee Retirement Income Security Act of 1974. In short, this is the federal law that creates standards for retirement, health, and pension plans. Even though such plans are typically set up privately, employers that opt to offer them have an obligation to meet the requirements under ERISA when implementing their plans. As such, ERISA provides protections for individuals who choose to participate in these programs, as it seeks to protect their assets from misuse.
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Primary ERISA Provisions
Here are some of the primary provisions of ERISA:
- It requires employers to provide specific plan information to participants such as the features and funding of the plan. It sets out a schedule of required information distribution.
- The Act advises when employees must be allowed to join the plan. In other words, it defines how much service can be required of an employee before he or she can participate.
- It notes how long employees can work before their benefit is unable to be forfeited. In other words, it defines the maximum amount of time employees must wait before they are considered to be vested and can receive the employer’s contributions to the plan upon payout.
- ERISA also establishes the length of time a plan participant can be away from work without affecting the plan.
- It regulates how benefits accrue.
- The Act notes that spouses of plan participants have some rights to the plan in the case of the participant’s death, and it also defines how this works.
- It guarantees benefits to be paid if the plan is terminated. (This guarantee comes from a federal corporation—the Pension Benefit Guarantee Corporation.)
- It establishes a claims and appeals process for benefits.
- ERISA outlines the fiduciary responsibilities for those who run the plan. In other words, it requires those in charge of the plan (anyone who has authority over the plan’s management or assets) to run it in such a way that it acts solely in the interests of the participants and beneficiaries. Funds must only be used for plan expenses and benefits. Those responsible for the plan must:
- Act prudently;
- Diversify investments to minimize risks;
- Ensure the plan’s terms are in compliance with all ERISA terms;
- Follow the terms set forth in the plan’s documents; and
- Avoid conflicts of interest.
- Any fiduciary who does not meet the above guidelines may be held personally responsible to make up losses associated with their actions.
- Participants can sue if they find breaches of this fiduciary duty.
Remember, creating a pension or retirement plan is voluntary, but if an employer chooses to do so, then ERISA, which is administered by the Department of Labor through their Employee Benefits Security Administration (EBSA) division, will apply.
ERISA Amendments Have Become Major Laws in Their Own Right
Since ERISA was created, it has been amended multiple times. Several of these amendments have had significant importance. We’ll outline a few of them here.
- It’s important to note that ERISA was expanded from its original form to include health plans and beneficiaries of such plans.
- COBRA (the Consolidated Omnibus Budget Reconciliation Act) was actually an amendment to ERISA. As most know, COBRA entitles workers to continue to receive their health insurance coverage for a limited time frame after ceasing employment in some cases.
- HIPAA (the Health Insurance Portability and Accountability Act) was another ERISA amendment. It protects workers with preexisting medical conditions and others from health coverage discrimination based on medical information.
These are just a couple of examples of the major amendments to ERISA over the years, but it’s not a fully comprehensive list.
Generally speaking, ERISA covers defined benefit plans, defined contribution plans, and welfare plans.
A defined benefit plan is a plan that outlines a predefined benefit upon retirement, such as a guaranteed monthly payment amount.
A defined contribution plan relies instead on contributions to be made over time, either by the employee, the employer, or both. These contributions are invested per the individual’s choice of plan investment options. The total benefit received depends on how much was contributed before retirement. Here are some examples of defined contribution plans:
A welfare plan is a plan that provides a benefit of some type, such as health, disability, etc. HMOs and some other insurance plans may be covered under this provision.
**This article does not constitute legal advice. Always consult legal counsel with specific questions.**
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.
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