What You Need to Know about ERISA

On Sept. 2, 1974, President Gerald Ford signed ERISA, the Employee Retirement Income Security Act. Since then, benefits managers have dreaded running afoul of this huge law. Does ERISA apply to your benefit programs? If so, what do you need to know?

ERISA established standards for private sector pension and health benefit plans to increase protections for plan participants and their families. It covers retirement, health and other welfare benefit plans (e.g., life, disability and apprenticeship plans).

ERISA gives EBSA, the Employee Benefits Security Administration, authority to oversee employee welfare plans. This division of the U.S. Department of Labor oversees approximately 707,000 private sector retirement plans, along with 2.23 million health plans and a similar number of other plans that provide benefits to approximately 141 million Americans.

As a federal law, ERISA takes precedence over any state or municipal laws governing benefits. However, it does not preclude states or municipalities from enacting their own laws governing benefits. (For example, certain cities, including San Francisco, have laws that require employers to provide health benefits to their employees.) Despite ERISA, states still have licensing and oversight authority over insurance programs.

When Does ERISA Apply?

ERISA applies to any “employee welfare benefit plan” that is “established or maintained by an employer” to provide benefits to the plan’s participants and their beneficiaries. This includes some, but not all, voluntary or employee-paid plans. Even if the employer does not contribute a single dollar to the plan, ERISA might apply.

To determine whether your voluntary plan falls under ERISA, start with the Department of Labor’s rules detailing “safe-harbor exemptions” from ERISA regulations.
To fall within the safe harbor:

1. The employer can make no contributions.
2. Employee participation must be voluntary.
3. The employer’s function must be limited to collecting premiums through payroll deductions and remitting them to the insurer.
4. The employer cannot receive consideration in connection with the program (other than reasonable compensation for administrative services performed).

Intent doesn’t determine whether ERISA governs a voluntary plan or not. If a plan doesn’t meet all these criteria, ERISA applies.

What ERISA Requires Plan Sponsors to Do

The ERISA statute and regulations require benefit plans to produce specific paperwork. If your plan is fully insured, your insurer might handle this for you. However, it remains the plan sponsor’s responsibility to ensure compliance.
At a minimum, every employee welfare plan must have a written document that describes the benefit structure. These and other requirements make administering an ERISA plan more complex than administering other plans.

All types of benefit plans must provide summary plan descriptions (SPDs) to all participants, adhere to ERISA claims procedures, and file an annual Form 5500 financial status report. Employee welfare plans with fewer than 100 participants that are unfunded, insured or a combination of unfunded and insured might be exempt from Form 5500 filing. Other exceptions may apply. Please contact us to see whether your plans require a 5500 filing.
Pension plans have further requirements. They must have:

• A document that guides day-to-day operations;
• A trust fund to hold the plan’s assets;
• A recordkeeping system to track the flow of monies going to and from the retirement plan; and
• Documents to provide plan information to participating employees and the government.

The EBSA provides a 28-page document describing the various disclosures employers might have to make for pension and health plans at www.dol.gov/ebsa/pdf/rdguide.pdf.

Compliance Check

If your plan falls under ERISA,

• Check your plan’s eligibility criteria. ERISA sets minimum standards for participation, vesting, benefit accrual and funding. For example, if an employer maintains a pension plan, ERISA specifies when employees must be allowed to participate, how long they have to work before they have a nonforfeitable interest in their pension, how long participants can be away from their job before it might affect their benefit, and whether spouses have a right to part of their pension in the event of the participant’s death.
• Be fiscally prudent. ERISA established detailed funding rules that require plan sponsors to provide adequate funding for their plans.
• Understand your fiduciary responsibilities. Anyone who exercises discretionary authority or control over a plan’s management or assets or who provides investment advice to the plan becomes a fiduciary. Fiduciaries have an obligation to put plan participants’ interests ahead of their own and act for the plan participants’ benefit. Fiduciaries who fail to follow these principles of conduct may be personally responsible to restore any losses to the plan. Plan participants have the right to sue for benefits and breaches of fiduciary duty.

Keep in mind that ERISA does not require any employer to establish any benefit plan. It only requires those who establish plans to meet certain minimum standards. The law generally does not specify how much money a participant must be paid as a benefit.

ERISA has been expanded to include new health laws. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) amended ERISA to give certain former employees, retirees, spouses, former spouses, and dependent children the right to temporarily continue their health coverage at group rates if certain events would otherwise result in a reduction in benefits. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) amended ERISA to make health insurance more portable and secure for employees. And finally, ERISA was amended to conform to the Affordable Care Act of 2010. All insured health plans that are not grandfathered must comply with the Affordable Care Act’s provisions.