ERISA is a federal law. It applies to many private employers and establishes minimum standards for health, retirement (pension plans), and other welfare benefit plans, such as life insurance, disability insurance, or apprenticeship plans. These minimum standards protect not only employees but also employers. While ERISA law does not necessitate employers to offer plans, it sets critical standards for those that do.
What is ERISA Law?ERISA (the Employee Retirement Income Security Act) refers to a federal law enacted in 1974 and sets the minimum standards for many voluntary health and retirement plans in private industry. They seek to protect individuals who fall under these plans. ERISA requires plans to do the following:
- Provide members with relevant plan information about features and funding
- Provide fiduciary responsibilities for plan managers who control assets
- Establish a transparent grievance and appeals process for all participants to enable them to seek benefits from their plans
- Give participants the right to sue employers for benefits or breaches of fiduciary duty.
- The Department of Labor (DOL) creates the rules and duties that govern fiduciaries (plan managers), reporting, and disclosure.
- The IRS oversees the creation and management of participation funds and vesting rules.
- The Pension Benefit Guaranty Corp (PBGC), established as a guarantor of private pension funds.
Why was ERISA Enacted?ERISA puts a stop to many harmful employer and employee practices, and it ensures that contributions made are secure. The law sets standards for welfare and pension plans to protect employees or beneficiaries and safeguard any employer-sponsored program. Later amendments made impact employee-employer health coverage. ERISA law is complicated. It outlines regulation for plan managers to protect funds, ensure that the fiduciaries act in the fund's best interest, and ensure employees receive their benefits.
Plans That Fall Under ERISAERISA can cover both defined-contribution and defined-benefit plans that employers offer. Some employer-sponsored retirement accounts under ERISA law include pensions, 401(K) plans, profit-sharing plans, and deferred compensation plans. ERISA does not cover retirement plans that government entities and churches set up and administer, such as 403(B) plans. Additionally, ERISA does not apply to IRAs or Simplified Employee Pensions (SEPs). Furthermore, ERISA covers some non-retirement accounts like welfare benefits and employee health plans. Common examples of these plans include health reimbursement accounts (HRAs), health maintenance organization (HMO), flexible spending accounts (FSAs), life insurance, disability insurance, and some welfare benefit plans.
When Do You Face ERISA LawERISA rules bound all employers that contribute to a retirement or health plan. The company size or headcount is irrelevant. Only government entities and churches are exempt from compliance. Qualified plans refer to an employer-sponsored program that requires employee salary deductions or employer contributions. They generally need either employee contribution deductions on a pre-tax basis or tax-deductible contribution under IRS rules. Qualified plans must meet non-discriminatory regulations to ensure all employees are eligible for similar benefits. Non-qualified plans under ERISA include bonus plans and tax-deferred compensation. These are often a reserve of executive-level staff. Any contributions that an employer makes or deductions from employee salaries are taxable. ERISA keeps participants informed of their rights and grants them the right to sue for breaches of fiduciary duty and benefits. ERISA also guarantees payment of particular benefits through the Pension Benefit Guaranty Corporation, a federally chartered corporation. It ensures that participants don't lose their retirement contributions upon the termination of a defined plan.
ERISA Law and Health InsuranceOver the years, ERISA has undergone several amendments to include two commonly-known acts that directly impact employer-plan health insurance policies:
- COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985) allows separated employees to continue purchasing health coverage from employers for up to 18 months (or 36 months for beneficiaries – spouses and children) unless their termination was for gross misconduct. Qualifying events, such as divorce, also allow previously covered spouses to continue purchasing benefits.
- The second amendment to ERISA was HIPPA (Health Insurance Portability and Accountability Act). It removed previously-held employee barriers when seeking to change employers or health insurance providers by eliminating or reducing pre-existing conditions exclusions.