5.1 Employee Retirement Income Security Act (ERISA)
8 min read•august 20, 2024
ERISA sets minimum standards for private retirement and health plans, protecting employees' rights and benefits. It covers employer-sponsored plans, outlines fiduciary responsibilities, and requires transparent disclosures to participants.
ERISA preempts state laws related to employee benefits, creating a uniform national framework. It defines different plan types, establishes reporting requirements, and sets and funding standards. Various amendments have expanded ERISA's protections over time.
Overview of ERISA
The is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans
ERISA requires plans to provide participants with plan information including important information about plan features and funding, provides fiduciary responsibilities for those who manage and control plan assets, requires plans to establish a grievance and appeals process for participants to get benefits from their plans, and gives participants the right to sue for benefits and breaches of
ERISA coverage
Employer-sponsored plans
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ERISA covers retirement plans () and , such as health plans, established or maintained by employers or by employee organizations, such as a union
Participants in employer-sponsored plans include current employees, former employees, and beneficiaries of employees in the plan
ERISA does not require employers to establish plans or to provide specific types of benefits, but employers who do establish plans must follow ERISA's rules
Exemptions from ERISA
ERISA exempts certain types of plans from its requirements, including governmental plans, church plans, plans maintained solely to comply with workers' compensation, unemployment, or disability laws, and plans maintained outside the United States primarily for the benefit of nonresident aliens
ERISA also does not cover plans established or maintained by employers engaged in commerce or in any industry or activity affecting commerce, or by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce
ERISA protections
Fiduciary responsibilities
ERISA requires plan fiduciaries to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses
Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses
Fiduciaries must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA, and they also must avoid conflicts of interest
Disclosure requirements
ERISA requires that plans provide participants with a (SPD) written in a manner calculated to be understood by the average plan participant
The SPD must include information about the plan's benefits, the rights of participants and beneficiaries under the plan, and the responsibilities of the plan's fiduciaries
Plans must also provide participants with a (SMM) whenever there is a material change to the plan or any change in the information required to be in the SPD
Claims procedures
Every employee benefit plan must establish and maintain reasonable procedures governing the filing of , notification of benefit determinations, and appeal of adverse benefit determinations
The must be described in the SPD and must not contain any provision or be administered in a way that unduly inhibits or hampers the initiation or processing of claims for benefits
ERISA enforcement
Department of Labor role
The 's Employee Benefits Security Administration (EBSA) is responsible for administering and enforcing ERISA
EBSA conducts investigations and audits to detect and correct violations of ERISA and related laws
EBSA also provides compliance assistance to help plan sponsors understand and comply with ERISA's requirements
Participant lawsuits
ERISA allows plan participants and beneficiaries to file a lawsuit in federal court to enforce their rights under ERISA and their plan
Participants can sue to recover benefits due under the plan, to enforce their rights under the plan, or to clarify their rights to future benefits
Participants can also sue for breach of fiduciary duty and can seek remedies to make the plan whole, including restoration of losses to the plan, disgorgement of profits, and removal of fiduciaries
ERISA preemption
State law preemption
ERISA preempts state laws that relate to employee benefit plans, meaning that these state laws are superseded by ERISA and cannot be enforced
The is intended to create a uniform national framework for employee benefit plans and to avoid subjecting plans to conflicting state regulations
ERISA's preemption provision is broadly worded and has been interpreted by the courts to have a wide reach, preempting many state laws that have only an indirect effect on employee benefit plans
Exceptions to preemption
ERISA does not preempt state laws that regulate insurance, banking, or securities, even if these laws relate to employee benefit plans
ERISA also does not preempt generally applicable criminal laws of a state
In addition, ERISA does not preempt state laws that were in effect before January 1, 1975, and that prohibit an employee benefit plan from excluding an individual from participation on the basis of health status
ERISA plan types
Defined benefit plans
A promises a specified monthly benefit at retirement, often based on a formula that takes into account the employee's salary and years of service (final average pay formula)
The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement
Alternatively, the plan may calculate a benefit through a plan formula that considers such factors as salary and service, an example being 1% of average salary for the last 5 years of employment for every year of service with an employer
Defined contribution plans
A , on the other hand, does not promise a specific amount of benefits at retirement
In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate (5% of earnings annually)
These contributions generally are invested on the employee's behalf, and the employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses
Welfare benefit plans
Welfare plans provide health, dental, vision, life insurance, disability insurance, and other non-retirement benefits to employees and their dependents and beneficiaries
Many of ERISA's provisions applicable to pension plans, such as vesting and funding requirements, do not apply to welfare plans
However, ERISA does impose various requirements, claims procedure requirements, and fiduciary duty rules on welfare plans
ERISA reporting
Form 5500
ERISA requires plan administrators to file an annual report, the Series, which contains information about the plan's financial condition, investments, and operations
The Form 5500 is filed with the Department of Labor and is available to the public
The Form 5500 must include a financial statement and opinions from an independent qualified public accountant, unless an exemption applies
Summary plan descriptions
The summary plan description (SPD) is the primary vehicle for informing participants and beneficiaries about their plan and how it operates
The SPD must be written in a manner calculated to be understood by the average plan participant and must be sufficiently comprehensive to apprise the plan's participants and beneficiaries of their rights and obligations under the plan
ERISA and Department of Labor regulations require that the SPD include specific information, such as the plan's requirements for eligibility and benefits, the source of contributions to the plan and how they are calculated, vesting provisions, and claims procedures
ERISA vesting
Cliff vesting
requires an employee to work a specified number of years, often 5, before becoming 100% vested in the employer-funded benefits
If an employee leaves employment before completing the required years of service, they forfeit the entire employer-funded benefit
Graded vesting
Under a schedule, an employee becomes vested in a certain percentage of their accrued benefits after completing a specified number of years of service
The minimum vesting schedule under ERISA for defined benefit plans requires a participant to be 100% vested after 5 years of service (cliff vesting) or to be 20% vested after 3 years of service and an additional 20% for each subsequent year until the participant is 100% vested after 7 years of service
ERISA funding
Minimum funding standards
ERISA requires that pension plans meet
For defined benefit plans, employers must make annual contributions to the plan in amounts that are actuarially determined to provide the benefits promised by the plan
For defined contribution plans, the employer must make the contributions specified by the plan terms
Pension Benefit Guaranty Corporation
The (PBGC) is a federal agency created by ERISA to protect pension benefits in private-sector defined benefit plans
If a plan terminates without sufficient assets to pay all promised benefits, PBGC steps in and pays pension benefits up to the maximum guaranteed amount set by law
The PBGC is funded by insurance premiums paid by companies whose plans it protects, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans
ERISA amendments
Consolidated Omnibus Budget Reconciliation Act (COBRA)
COBRA amended ERISA to provide certain former employees, retirees, spouses, former spouses, and dependent children the right to temporary continuation of health coverage at group rates in instances where coverage would otherwise be terminated (job loss)
COBRA requires group health plans sponsored by employers with 20 or more employees in the prior year to offer employees and their families the opportunity for a temporary extension of health coverage in certain instances where coverage under the plan would otherwise end
Health Insurance Portability and Accountability Act (HIPAA)
amended ERISA to make health insurance more portable and secure for employees
HIPAA limits exclusions for preexisting conditions, prohibits discrimination against employees and dependents based on their health status, and allows a special enrollment period in which individuals can enroll in a health plan if they lose other coverage or experience certain life events
HIPAA also includes privacy protections for individually identifiable health information
Newborns' and Mothers' Health Protection Act
This Act requires plans that offer maternity coverage to pay for at least a 48-hour hospital stay following childbirth (96-hour stay in the case of a cesarean section)
Mental Health Parity Act
This Act requires annual or lifetime dollar limits on mental health benefits to be no lower than any such dollar limits for medical and surgical benefits offered by a group health plan
Women's Health and Cancer Rights Act
This Act requires group health plans that provide mastectomy coverage to also cover breast reconstruction, prostheses, and treatment of physical complications of mastectomy