Employee Retirement Income Security Act (ERISA)
A federal law that provides retirement protection for American workers.
What Is the Employee Retirement Income Security Act (ERISA)?
The Employee Retirement Security Act is a federal law that provides retirement protection for American workers. It was signed into law in 1974 and states that qualified plans must follow it to ensure that fiduciaries do not misuse plan assets.
By ensuring fiduciaries follow the rules, ERISA must set minimum standards for participation, vesting, benefit accrual, and funding of retirement plans. In addition, this protection act grants participants the right to sue for benefits if there are breaches of fiduciary duty involved.
It must provide and inform participants about ERISA's features and funding. ERISA is enforced by the EBSA (Employee Benefits Security Administration) and covers certain non-retirement accounts, like employer-sponsored healthcare plans.
This does not cover plans established or maintained by the government or the church. It doesn’t cover plans that comply with applicable worker's compensation, unemployment, and disability laws, either, nor plans maintained outside the US.
Throughout this article, we will go through the functions and features of the ERISA, give some examples of plans that fall under this rule, and explain the plan's main purpose.
Key Takeaways
- ERISA, enacted in 1974, is a federal law that sets standards for private-sector employee benefit plans, including retirement plans, health insurance, and other welfare benefit programs.
- ERISA applies to most private-sector employers that offer employee benefit plans, including pension plans, 401(k) plans, health insurance, and disability insurance.
- ERISA imposes strict fiduciary standards on plan administrators, trustees, and other individuals responsible for managing employee benefit plans.
- ERISA sets rules regarding vesting and participation in retirement plans. It requires plans to offer employees the opportunity to participate in the plan and earn vested rights to their accrued benefits over time.
History of the Employee Retirement Income Security Act (ERISA)
Title I provision of the ERISA was passed to address concerns about pension plans being abused or mismanaged. One example of this occurring happened in Indiana in 1963, where Studebaker closed its factory because the benefits of 4,000 employees were underfunded.
Another instance where something similar happened occurred with Teamsters. Teamsters' funds had questionable loans for real estate and casino developments in Las Vegas, which led to fiduciary malfeasance issues with retirement accounts in the 1960s and 1970s.
These two examples show the irregularities that ERISA addressed. The House of Representatives passed ERISA in February 1974, with approval from the senate a month later. President Gerald Ford signed it, fully enacted into law on September 2nd, 1974.
Over the years, ERISA has gone through several adjustments. For example, lawmakers approved amendments to lower the age limit required for retirement plans and expanded the total time a worker can be away from work before they lose out on their plan’s vesting period.
functions of Employee Retirement Income Security Act (ERISA)
ERISA is meant to hold fiduciaries responsible for their actions when it comes to maintaining employer-sponsored retirement and healthcare plans. This act was signed into law by the federal government in 1974.
A fiduciary acts as anyone who can exercise discretionary authority over the management or assets of a plan. They also address fiduciary provisions and can ban the misuse of assets through these provisions.
Some of the plans that fall under the ERISA include
- 401(k),
- 403(b),
- employee stock ownership, and
- profit-sharing plans.
It also covers private-sector health plans such as
- health maintenance organization plans,
- flexible spending accounts,
- disability, and
- insurance plans.
This law can also define how long a person can work before they are eligible to participate in a plan, accumulate benefits, and have rights to those benefits. It also establishes detailed funding rules to provide adequate funding for retirement plans.
Note
ERISA enacts minimum funding rules for pension plans to add security to employer promises.
What is the main purpose of ERISA?
This act's main intention is to protect the interests of employees who participate in employee benefit-sponsored healthcare and retirement plans. These protections are also extended to retirees and plan beneficiaries.
ERISA regulates plan administrators' and sponsors' provision of plan information to participants, ensuring they comply with fiduciary duties and protect their clients' funds.
ERISA states that administrators and sponsors must not mismanage retirement savings and funds and ensure they are in the right hands. Otherwise, they will be held to a high standard if they don't act in the best interests of their clients or are being used irresponsibly.
This act is useful for individuals receiving coverage if they have pre-existing conditions and can help unemployed individuals extend their health benefits for a limited time in case someone loses their job. Qualifying participants can also receive benefits if the company breaks.
ERISA Regulation and Standards
ERISA is used to educate corporations, employees, and managers about their retirement and healthcare plans. These plans are also meant to provide participants with updates and statements about the act.
Plan administrators must submit statements and inform clients about quarter updates, such as Q1 in Q2, Q2 in Q3, etc.
Participants must also be aware of the document terms, ensure their plans provide regular fee discourses every full year, update them with any changes in the plan in a timely and efficient manner, and ensure deposits and deferrals are submitted on time.
Plan administrators also have the option of doing paperwork on their own. If it becomes convoluted or unorganized, they can hire a third party to help or do the work for them. It does not discharge the administrator from doing their fiduciary responsibilities to their clients.
Employee Retirement Income Security Act (ERISA) FAQs
ERISA covers private-sector companies that provide pension plans to participants. These companies include LLCs, S-corporations, C-corporations, proprietorships, and companies structured as partnerships.
ERISA is not eligible for churches, government operations, or plans that are maintained to comply with applicable workers' compensation, unemployment, and disability laws.
Most private health sectors can be covered under the ERISA. They can provide protections for participants, mandatory plans, employer contribution plans, and beneficiaries in employee benefit plans and provide information on how plans can be administered.
If the employer has discretionary authority or control of certain employer-sponsored retirement or healthcare plans or provides investment advice on the direction of assets, then yes, an employer can be covered.
Some violations occur when the fiduciary does not meet their responsibility and the company's standards. For example, if a plan administrator does not fully disclose fees and benefits, they commit a violation.
Another example of a violation will be if someone fails to update information about the plans to participants, whether it be statements, notices, disclosures, etc.
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